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SMPL Simply Good Foods

Participants
Joe Scalzo President and CEO
Todd Cunfer CFO
Mark Pogharian VP, IR, Treasury and Business Development
Jason English Goldman Sachs
Chris Growe Stifel
Fiza Ali Deutsche Bank
Wendy Nicholson Citi
Rob Dickerson Jefferies
Alexia Howard Bernstein
Eric Larson Seaport Global
Ryan Bell Consumer Edge
Call transcript
Operator

Greetings. Welcome to The Simply Good Foods Company’s Fiscal Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I would now turn the conference over to Mark Pogharian, Vice President of Investor Relations. Mark, you may now begin.

Mark Pogharian

Thank you, operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the second quarter ended February 27, 2021. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7.00 AM Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the company’s Web site at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today’s remarks will also be made available.

During the course of today’s call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today’s press release and in the company’s SEC filings. Note that on today’s call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

Given the company’s asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS.

We have included a detailed reconciliation from GAAP to adjusted items in today’s press release. We believe these adjusted measures are a key indicator of the true underlying performance of the business. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I’ll now turn the call over to Joe Scalzo, President and Chief Executive Officer.

Joe Scalzo

Thank you, Mark. Good morning and thank you for joining us. Today, I’ll recap Simply Good Foods’ second quarter results and provide you with some details on the performance of our brands. Then, Todd will discuss our financial results in a bit more detail. And we'll wrap it up with a discussion of our outlook before opening it up to your questions.

Second quarter net sales increased 1.5%. Core ongoing net sales, that excluding the impact of our SimplyProtein divestiture and European business exit, increased 2.7% driven by continued e-commerce growth, Quest success in new forms and solid international performance.

As expected, trade promotion expense was greater than last year, supporting higher levels of in-store merchandising and display.

Additionally, as discussed last quarter, Q2 shipments slightly lagged consumption as certain retailers adjusted back from a Q1 inventory built.

Importantly, throughout the quarter, retailer support for the category and our brands remained strong. Adjusted EBITDA for the second quarter increased to 2.2%, primarily due to strong cost controls and Quest acquisition synergies. Total Simply Good Foods second quarter retail takeaway, including unmeasured channels, increased mid-single digits with IRI measured channel growth of 1.7%. Marketplace trends were similar to last quarter.

Specifically, our performance was driven by the snackier portion of our portfolio, primarily confections, chips and cookies that are consumed mostly at home. Bars for both brands remained temporarily soft in measured channels due to fewer on-the-go usage occasions. In the second quarter, we executed well against our priorities driving sales and earnings growth in a challenging marketplace.

We are well positioned over the remainder of the year and have initiatives in place that we believe will result in solid financial results. Consistent with the first quarter, total Simply Good Foods second quarter retail takeaway in measured channels outpaced the category across all timeframes, driven primarily by the snackier portion of our portfolio.

Importantly, the company gained market share as did each of our brands in their respective sub-segments of weight management and active nutrition. The active nutrition segment of the category, which includes Quest, increased mid-single digits. Quest POS outperformed the active nutrition segment, nearly 3 to 1 during the quarter. I would note that IRI MULO C-store universe represents about 70% of Quest’s total consumption. The weight management segment, which includes Atkins, remained soft in the second quarter and declined high-single digits due to fewer on-the-go usage occasions. In the second quarter, Atkins continued to outpace the weight management category.

While early, our marketplace trends in the third quarter are improving. Atkins’ second quarter U.S. retail takeaway in measured and unmeasured channels declined low-single digits.

And solid e-commerce growth, about 10% of Atkins’ U.S. sales, was offset by softness in traditional brick and mortar. Atkins’ IRI MULO and C-store measured China retail takeaway was off 5.7%, identical to the first quarter. Performance in December and January sequentially improved versus the first quarter, but February’s POS declined mid-single digits, impacted by winter storm store closures.

Importantly, retailer support in the quarter was solid and in-store merchandising and display was greater than last year, supporting consumer seasonal participation.

As expected, channel and form trends were similar to the last few quarters. Atkins’ confections momentum continued with POS growth of 14.3% as these products are primarily consumed at home. Bars and shakes performance was similar to the first quarter, impacted by fewer on-the-go usage occasions. E-commerce growth continues to be a strength with consumption up about 50% in the quarter. Bars and shakes and confections, all increased strong double digits with shakes outperforming and representing about 50% of e-commerce sales in the quarter.

We are pleased to see the buyer growth continued from the first quarter into the second reflecting consumers renewed interest in weight management, as they begin to emerge from COVID-19 movement restrictions.

We’re encouraged that both growth in new buyers and loyalty among retained buyers tracks similarly to pre-COVID-19 benchmarks.

Importantly, consumers are coming back to the brand and recognize the attributes and benefits of our products as a way to help them achieve their goals. Buy rate is a key metric impacting Atkins returned to pre-COVID-19 growth levels. Overall, buy rate was below prior year levels due to reduced consumption among bars and to a lesser degree shakes.

Importantly, recent research indicates a high correlation, over 0.8 between return to work and Atkins bar and shake consumption, reinforcing our belief that improving consumer mobility will positively impact buyer consumption and buy rate.

As we enter the third quarter, we would point to four key factors related to the Atkins brand.

First, year ago comparisons are easier as we lapped last year’s significant consumption declines from the early stages of COVID-19 lockdowns.

Second, we're starting to see early signs of improvement in shopper traffic in measured channels, especially in the mass class-of-trade.

Given Atkins’ development in this channel, it should help both buyer growth and consumption.

Third, effective marketing and new product innovation should enable us to continue to build on our year-to-date buyer trends. And the potential improvement in consumer mobility should help accelerate buy rate of bars and shakes. And lastly, we expected store merchandising and display would be greater than prior year’s reduced levels as retailers anticipate consumer shopping and consumption habits will improve.

Now let me turn to Quest.

Our second quarter retail takeaway increased 16% in the measured IRI MULO C-store universe.

Importantly, trends improved across the major food, mass and convenience channels. Similar to last few quarters, our performance was driven by snacks consumed at home.

As we lapped the year ago launch of ready-to-drink shakes, this headwind has been offset by improving bar performance and the launch of the Quest peanut butter cup that’s off to a good start. Quest bars performance sequentially improved and declined about 4% in the quarter versus 8% in the first quarter. This was significantly better than the bar segment that was off low double digits in the first half of the year.

As I stated earlier, Quest e-commerce business continues to do well with retail takeaway up 60%.

Our business at Amazon is strong. Chips more than doubled. Bars and cookies increased more than 50%. And confections momentum is building. In the second half of fiscal 2021, we anticipate that POS will continue to be strong in measured and e-commerce channels in the third quarter and moderate a bit in the fourth, as we lap strong comparisons in the year ago period. Chips and confections momentum will continue and bar performance will improve. And similar to Atkins in-store merchandising and display has been reinstated versus the prior year pullback as retailers anticipate consumer shopping and consumption habits will begin to recover. In summary, we're pleased with our second quarter results that were largely in line with our expectations. Retail takeaway was slightly better than expected driven by solid e-commerce growth, as well as Quest performance in measured channels. The sequential improvement in nutritious snacking category trends over the last few quarters is encouraging, and the positive growth in Atkins buyers indicates weight management is becoming increasingly more relevant. Combined with easier year ago comparisons and improving shopping traffic in measured channels, we expect solid growth in the second half of the fiscal year. Recall [ph] our analysis indicate that as consumer mobility increases, it correlates to greater levels of consumption of our brands.

Our fiscal third quarter is off to a fast start and we're executing well against our plans and initiatives that should drive sales and earnings growth over the remainder of the year.

Now, I’ll turn the call over to Todd to provide you with some greater financial detail.

Todd Cunfer

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods second quarter net sales increased 1.5%. The core North America and international net sales increase contributed 1% and 1.7%, respectively, to total company growth, while the SimplyProtein brand divestiture and the European business exit were a combined 1.2% headwind. North America growth was driven by strong Quest volume performance in both measured and non-measured channels, and modest declines in Atkins.

Specifically, Atkins solid e-commerce performance was offset by declines in measured channels, an increase of trade promotion expense due to higher levels of in-store merchandising versus the year ago period and the previously mentioned timing of shipments in the first quarter related to the seasonal retail inventory built of about a 2% headwind.

Our core international business was a 1.7% benefit to sales growth driven by gains in Australia for both Atkins and Quest. We anticipate that growth in this region will temper in the second half of the year, as we lap these initiatives that began about one year ago. The divestiture of SimplyProtein and the European business exit will be about a combined 1.5% headwind to full year fiscal '21 net sales growth versus our previous estimate of 2%.

Now for a review of second quarter results across other major metrics. Gross profit was 90.3 million, an increase of 4.9 million or 5.7% versus last year. Gross profit in the prior year was affected by a non-cash 5.1 million inventory purchase accounting step up adjustment related to the Quest acquisition.

Excluding the inventory step up, gross profit was 90.5 million last year. This resulted in a Q2 gross margin decline of 70 basis points due to higher levels of in-store merchandising and unfavorable product form and channel mix. Productivity and Quest acquisition synergies offset modest supply chain inflation, primarily inbound trade to our distribution center. In the second half of fiscal year 2021, we expect slightly lower gross margin due to return to typical retail in-store merchandising levels and modest inflationary impacts. The reduction of in-store activity in the year ago period was due to lower shopper traffic related to COVID-19. Therefore, full year fiscal '21 gross margin, apart from the inventory purchase accounting step up in the year ago period, is expected to be slightly lower compared to fiscal 2020.

While input costs are not expected to be a meaningful headwind in fiscal '21, we are seeing some inflationary pressure as we examine our fiscal 2022 needs.

Our strategy is to maintain and increase gross margin and we are assessing the levers available to mitigate potential input cost inflation. Adjusted EBITDA which excludes Quest integration costs, restructuring expenses and stock-based compensation increased 2.2% or 0.9 million to 42.6 million primarily due to cost control measures and Quest acquisition synergies. Overall, SG&A expenses were in line with our estimates.

Specifically, selling and marketing expense declined 0.7 million due to lower selling costs as a result of Quest synergies and the divestiture of a SimplyProtein brand. And G&A expenses declined 0.4 million as integration synergies and cost control more than offset higher incentive compensation. Note that the company Q2 marketing expense was about the same as last year, primarily due to the elimination of investments in the SimplyProtein brand.

However, core North America and international marketing expenses increased 8% versus last year.

For the full year, the company continues to anticipate that marketing expense related to its core business will increase at least in line with organic sales growth.

Moving to other items in the P&L. Interest expense declined 2.6 million to $8 million due to the pay down of term loan debt.

Our effective tax rate in the second quarter was 27.7%, about the same as last year. Net income in Q2 was $19.1 million versus 10.7 million in the year ago period. Year-to-date results are as follows. Net sales increased 32.5 million or 21.8% to 461.8 million driven primarily by the Quest acquisition. The SimplyProtein divestiture and the European business exit were a combined 1.4% headwind. Gross profit was 184.3 million, an increase of 36.7 million or 24.9%, driven by the Quest acquisition. Gross profit in the prior year was affected by a non-cash 7.4 million inventory purchase accounting step up adjustment related to the Quest acquisition. Recall the non-cash inventory purchase accounting step up was a 200 basis point headwind in the fiscal first half of 2020.

Excluding this amount, gross profit was 155.1 million last year. This resulted in year-to-date gross margin decline of 100 basis points driven by higher levels of in-store merchandising and the inclusion of a full 26 weeks of the slightly lower margin Quest business.

Excluding Quest’s integration costs, restructuring expenses and stock-based compensation, adjusted EBITDA increased 24.2% to $91.3 million, primarily due to the inclusion of 26 weeks of Quest results in the current year as well as cost control measures and acquisition synergies. The increase in SG&A expenses were primarily driven by the inclusion of Quest.

Specifically, selling and marketing expenses increased 13.3% or $6 million to 51.3 million. The majority of the increase was due to the addition of Quest. G&A expenses increased about 15% or 5.5 million, again, primarily due to the inclusion of Quest. The net impact of interest income and interest expense was an increase of 2.3 million due to a full six months of the acquisition-related debt. Income tax expense was $15.7 million versus 2.2 million in the prior year. Year-to-date, net income was $41.6 million versus 5.9 million last year.

Turning to EPS.

Second quarter reported EPS was $0.19 per share diluted compared with $0.11 per share diluted for the comparable period of 2020. In Q2 2021, depreciation and amortization expense and stock-based compensation was $7 million, about the same as the year ago period. Costs associated with Quest restructuring were $2.2 million, 7.5 million lower versus last year. Adjusted diluted EPS which excludes the items just mentioned was $0.25, an increase of $0.02 versus the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense and income taxes. Year-to-date reported EPS was $0.41 versus $0.06 per share primarily due to the inclusion of Quest as well as lower acquisition and integration-related costs. Year-to-date, adjusted diluted EPS was $0.54, an increase of $0.09 versus the year ago period. Please refer to today's press release for an explanation and a reconciliation of non-GAAP financial measures.

Moving to the balance sheet and cash flow. In February 2021, the company paid down $25 million of its term loan debt. And at the end of the second quarter, the outstanding principal balance was 556.5 million. Building on last quarter’s cash flow from operations, in the second quarter the company generated about $25 million of cash, resulting in 39.8 million of cash flow from operations in the first half of fiscal 2021. Note that the company typically generates higher levels of operating cash flow in the second half of the year versus the first half.

As of February 27, 2021, the company had cash of 91.3 million and the trailing 12-month net debt to adjusted EBITDA ratio was 2.7x. Capital expenditures in the first half of the year were 0.4 million. We still expect $5 million to $6 million of CapEx in fiscal 2021, driven primarily by equipment for our new warehouse.

Our outlook this year for interest expense remains unchanged at approximately $30 million. I would now like to turn the call back to Joe for closing remarks.

Joe Scalzo

Thanks, Todd.

Our business continues to perform well despite the significant effects over the last year due to reduce consumer mobility related to COVID. In the second half of the year, we anticipate improving retail takeaway trends in our business driven by easier year ago comparisons, improving shopper traffic in brick and mortar, especially the mass channel, and strong buyer growth on both our brands.

Assuming consumer mobility in the United States remains at current levels and broad lockdowns are not reimposed, we anticipate full year net sales of $930 million to $940 million and adjusted EBITDA of $180 million to $185 million. That includes a combined 1.5 headwind to net sales growth related to the SimplyProtein divestiture and our European business exit.

As Todd mentioned earlier, given year-to-date gross margin performance, full year fiscal 2021 gross margin is expected to be slightly lower than fiscal 2020. The company continues to anticipate adjusted EBITDA margin expansion as acquisition synergies and SG&A cost controls are expected to more than offset reinstated in-store merchandising, modest supply chain inflation, and higher incentive compensation.

Additionally, the company anticipates 2021 adjusted diluted EPS to be in the range of $1.07 to $1.11 versus $0.91 in fiscal year 2020. The combination of Atkins and Quest provides us with two uniquely positioned brands that are aligned around the consumer megatrends of wellness snacking, convenience and meal replacement. And consumer feedback indicates that these megatrends will become increasingly more relevant as consumers return to work, school and more normal lives.

We have an advantage asset-light variable business model that enables strong cash flow from operations and provides us with the financial flexibility to invest in organic growth opportunities and participate in M&A.

We are confident in our growth prospects and are executing against our strategies that position us to deliver on our financial objectives with the ability to invest in the business as a path towards increasing shareholder value over time. We appreciate everyone's interest in our company. And we are now available to take your questions.

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Thank you.

Our first question is coming from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Jason English

Hi. Good morning, folks. Thank you for stepping me in.

Joe Scalzo

Good morning, Jason.

Jason English

I’ve only got two questions, and I apologize if I missed this in the prepared remarks, but can you tell us what the organic sales growth was for both the Atkins brand and Quest brands?

Todd Cunfer

For the quarter, you'll see in the Q Atkins was down about 10%, largely due to the shift from Q1. Also we had some -- due to the storms in Texas, we had a fair amount of shipments particularly on the Atkins brand that kind of got held up in transit. That will come back in Q3.

So versus a low-single digits total consumption, timing of shipments was off a bit on Atkins. Quest, on the other hand, was up in the high teens.

Jason English

Okay. And I think I heard -- Todd, I think I heard you mentioned in the prepared remarks that that pull into Q1 out of Q2 was about 2 points on Atkins --

Todd Cunfer

Yes.

Jason English

Okay.

So implying that this deferral of shipments into Q3 may actually be like an 8 point or larger type benefit for Atkins? Am I doing the math properly on that?

Todd Cunfer

Yes. It's probably not that much.

We also pullback with our new business model in Canada that affected the North America business for Atkins as well, we lost a point or two there.

So we lost a few points due to the storms that will go right into Q3. And then we lost a little bit in Canada as well.

Jason English

Got it, that's helpful. And, Joe, a quick question for -- or Todd, a quick question for clarification on the outlook. In prepared remarks, you mentioned that your guidance is predicated on the current consumer mobility levels sort of holding steady rather than sequentially improving, but at the same time right before that you mentioned that you expect mobility to continue to improve.

So I guess the question is, which is it? From your planning assumptions, are you assuming stagnation on mobility or are you indeed expecting and planning for continued progress?

Joe Scalzo

We're actually -- the assumptions in our guidance for the second half of the year assumes status quo.

Jason English

Excellent. Thank you so much for the clarification. I'll pass it on.

Operator

The next question is from the line of Chris Growe with Stifel. Please proceed with your questions.

Chris Growe

Hi. Good morning.

Joe Scalzo

Hi, Chris.

Chris Growe

Just had a question for you.

As I think about the current state of your business, the current mobility and the sort of sales that's creating at least in measured channels that we can track, I realize we're not going to get the full picture because of the very strong growth in e-commerce, but it would seem to suggest against the really easy comps of the prior year some very strong sales momentum in the third quarter, and so really easy comps in those kind of April and May in particular from the prior year. I just want to get a sense of how to think about like the current rate of revenue. And again, in a world where you don't expect mobility to improve, should this general rate of sales hold based on your assumptions and if there's any other considerations around that, like inventory movements or we got a little bit of that just now from Jason's question, but also promotional timing, things that could distort it up or down in the coming quarters?

Joe Scalzo

Probably helpful to think of it on a quarter basis.

So historically, third quarter is a bigger quarter for us than fourth.

So I would think, Chris, the kind of run rates you're seeing right now probably will be more like we'll see in the third quarter kind of week-to-week. And then we would expect some softening because we do see it historically in the fourth quarter, just based upon kind of the seasonality of the business. And then you rightfully pointed out that we saw higher levels of inventory in transit at the end of the second quarter, which obviously just flow right into the third quarter.

So I think that's probably helpful from just how to think about run rate standpoint. And again, to Jason's question, we're assuming -- we learned a little bit about mobility, a little bit more specificity around mobility. And specifically, our brands correlate in particular bars and to a lesser degree correlate not to just consumption, correlate not just to general mobility, but being at work and being in transit to work.

So general mobility is a good benefit, because it improves shopper traffic, and in particular in mass, but we're really looking for people to get back to their normal lives and get back to work. And if you think about it, that makes a fair amount of sense.

While we've been sitting at home, we are probably eating more meals and using our products less for meal replacement, when we start going back to work and in transit to work, fewer meal occasions, more products in particular bars and shakes used as a meal replacement and/or snack network.

So for us mobility -- understanding what mobility really means made us a little bit more cautious as we moved into the second half of the year, because it seems like mobility is going to get better. But we really need people to get back to work. And for us that felt like fourth quarter, first quarter next year before at least the U.S. gets back to that state.

Chris Growe

Okay, that’s good color. Thank you.

Todd Cunfer

One other thing I would say if you remember from last year when COVID hit in March, retailers really just kicked out or pulled off all their promotions.

So we are lapping that now. We're kind of in normalized promotional period for Q3 and also for Q4.

So you're going to see -- if you remember last Q3, volume was way down which was not helpful for us, obviously, but our margins both at the gross margin and the EBITDA margin really benefited from that pullback in trade activity.

So the profit held very, very nicely. We're going to see a bit of a reversal of that in Q3.

I think we're going to have a very strong volume quarter as we lap Q3. We're also reinstating some trade.

So that will have a bit of a margin hit for the quarter. And then as we go into Q4, as we started to -- especially on the Quest side, Quest had a very strong Q4. They snapped back very, very quickly. And we had pretty normal trade activity in the quarter.

So the trade impact should be pretty nominal in Q4, but there will be a Q3 impact.

Chris Growe

Okay, that's good color. Thank you. And just a quick follow up because it kind of leads into the point you made there, Todd, around promotional spending.

I think what you just said is we should look for like more normalized promotional levels for the second half of the year. And I’m also just curious around that. If the degree to which incremental shelf space, the innovation, if that's prompting even more therefore than what's called a normalized level of promotion?

Todd Cunfer

I don't think so. Again, it was just really artificially low last year.

So we're going to go back to normal levels. And then just unfortunately year-over-year, it looks like there's incremental trade spend but it's really just getting back to kind of 2019 levels.

Chris Growe

Okay. Thank you for your time.

Todd Cunfer

Thank you.

Joe Scalzo

Thank you, Chris.

Operator

Our next question is from the line of Fiza Ali with Deutsche Bank. Please proceed with your questions.

Fiza Ali

Yes. Hi. Good morning.

Joe Scalzo

Hi, Fiza.

Fiza Ali

My first question is around Atkins.

I think we all know that there are two drivers that have impacted Atkins; one is maybe the weight management side of things and the other is just reduced consumer mobility, as you talked about. And I'm wondering how you think about those two drivers? Because you mentioned the renewed consumer interest in weight management and then you mentioned sort of return to work as two main components of bringing Atkins back to more normal levels.

So would just love more perspective around how you think about those two drivers going forward?

Joe Scalzo

Yes, well a great question.

First, if you just track what's happened since COVID, third and fourth quarter on Atkins, we saw a dramatic fall off in people coming to the brand.

So our new buyer growth post COVID through the end of our fiscal year was down dramatically, down double digits. And that impacted obviously total volume in the second half of the fiscal year on Atkins. Encouragingly starting in September and going through the second quarter, we've seen buyer flow, new buyers coming in, and loyalty among retained buyers at historic levels.

So people started coming back to the brand and coming back to weight management pretty much timed with the beginning of our fiscal year. That's encouraging. That means interest in weight management, interest in the brand has been strong since the start of our fiscal year.

So we feel pretty good that our marketing is working, our product innovation is working.

And so the gap in volume on Atkins, if you think of it from a buyer standpoint, is just straight out buy rate.

So how much people are consuming? And then that led us to a path of trying to understand what the driver of that is. And what we learned is there's a high correlation in bars and shakes on Atkins, and bars on Quest around being at work and being in transit. Fascinating, right? So what's driving Atkins' performance is not people's interest in weight management, it's flat out the number of occasions kind of where I am and how much I snack, right, how much I'm using it as a meal replacement? And as I mentioned earlier, when I'm home, I'm eating more meals and I'm using snack foods less as a meal replacement, right? And I might even snack less because I'm eating more regular meals because I'm home.

As I start getting back and going back to work and picking the kids to school and going to sports, convenience becomes more important, my snacking behavior goes up and I'm probably using our products more as a meal replacement. And then you can see that by form. Bars and shakes, which tend to be more meal replacement-oriented than snacking-oriented, doing less well as people have not been at work and in transit. And then what we call the snackier portion of our portfolio, so chips and cookies and confections, they had no correlation whatsoever to location.

So they're getting consumed at normal rates and we would not expect any change in those forms, as people return to work and return to their jobs and kids go back to school.

So for us very encouraging. Consumers are coming back to the brand. And as they get back to work, we're going to see buy rates go back. We're pretty confident of that.

Fiza Ali

Okay. That's super helpful. Joe, I was wondering if you could just -- like as we think about the bar trends for Quest versus Atkins, I know we talked about this earlier on in the pandemic how Quest was outperforming.

So I'm wondering if you have any evolved thoughts on why sort of the Quest brand specifically within the bar product form is doing better than Atkins?

Joe Scalzo

Yes, less correlated.

So it's interesting. We now have the data less correlated to at work and at transit than Atkins is.

So pretty interesting there. And then two, some of the drivers of Quest, so some of the distribution drivers improving distribution in general, some innovation on bars that's really doing well.

So Quest has done a slightly better job, less correlated to mobility and being at work.

And some nice innovation, in particular bars have done pretty well.

So we've seen Quest do a little bit better from a bar standpoint, obviously, not where we wanted to be, but certainly doing a little bit better than Atkins has during that period of time.

Fiza Ali

Great, thanks.

Todd Cunfer

I would say the last factor, Fiza, is Quest has always been over indexed in e-commerce. And obviously, that's the channel you want it to be in the last year and they continue to perform exceptionally well.

And so they have not been as reliant on brick and mortar, so that's helped that part of the business as well.

Fiza Ali

Great. Thank you.

Joe Scalzo

Fiza, the other interesting thing is if you just look at the development of the brands by channel, the largest retailer of Quest is Amazon doing exceptionally well. The largest retailer of Atkins is Walmart, very challenged on COVID.

So that fact alone, given the importance of those two retailers to each of the businesses, has a lot to do with the trajectory of the brands overall.

Fiza Ali

Great. Really appreciate it. Super helpful.

Operator

Our next question is from the line of Wendy Nicholson with Citi. Please proceed with your questions.

Wendy Nicholson

Hi. My first question is actually just a follow up to Fiza’s line of questioning because obviously there's a lot being talked about in terms of maybe consumer behavior will have shifted permanently from COVID. Maybe not everybody, I think every kid is going to go back to play soccer or but maybe not everybody's going back to the office and mobility won't be quite what it is, or was pre-pandemic.

So do you think about that in the context of Atkins in terms of changing the messaging? We all see the ads a ton, but does it make sense to rethink the product assortment or the messaging from the ads in terms of trying to appeal to people if they are in fact going to end up staying home and be less mobile going forward?

Joe Scalzo

Yes.

First, I would say a lot of that -- we've obviously participated in some of that conversation.

Just as the CEO running a business, as soon as I can get people back to work, I’m getting them back to work because of loss of efficiency in the organization.

So I think to some degree, there's various points of view on that.

I think it's -- the conversation is pretty overblown.

So my first observation is it's going to be more the same pre-COVID, post-COVID than it is different.

Just an observation.

Second, yes, obviously, we would adjust marketing.

You're already starting to see on Quest development of what I would call everywhere, every time snacks.

So the confections – the peanut butter cup confections to the chips and the cookies tend to behave differently than bars and shakes do, so the development of that portion of the franchise becomes very important in that it becomes less site specific, less time specific. Clearly, Atkins has that development to the confections, but you'll see us starting to innovate in snacks that have less dependence upon kind of being at work and being in transit over time. That's obviously a second strategy and we're pushing that strategy pretty well. But I got to say, I don't think you're going to see dramatic changes in work performance. I expect most companies will be back at work when they have the opportunity to get back to work. Exactly when that's going to happen is anyone's guess. But it's feeling like somewhere between the 4th of July and Labor Day, people start moving back to the office.

Wendy Nicholson

Fair enough. And then just on the commodity side, I know you called out a little bit of inflation, which is less than what a lot of the other food companies are talking about. And I know that's a function of the products you sell and the product mix and all of that. But can you talk about your sense of sort of the elasticity of demand to the extent inflation continues to creep up, your willingness to raise prices, whether you think that will affect demand for the product, both on the Atkins and the Quest side?

Todd Cunfer

Yes.

So we have not taken -- on Atkins we have not taken a price increase in about four or five years. And we are more than prepared if necessary to do it. We're constantly looking at opportunities and running the elasticity models to see kind of if we did take price, what would that impact be? We're very, very confident that we can execute a price increase and not only maintain strong volumes, but also obviously deliver the price realization that we need. Where we're seeing -- we've been fortunate where we've been locked in -- our team has made some really nice bets on locking in commodities earlier in the year and we've benefited from that. We're seeing a little bit more impact than we thought a couple of months ago on some of the proteins, both dairy and soy, and we talked about inbound freight with higher diesel.

So luckily, it's not much of an impact for this year, just a little bit more in the second half than we anticipated, but pretty nominal. If prices stay where they are right now, we'll probably have to do something and look at pulling some levers as we go into our next fiscal year. But we're doing the work right now on elasticity models. We're very, very confident that if we chose to do that, we could execute it very, very well.

Wendy Nicholson

Fair enough. Thank you very much.

Operator

Our next question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.

Rob Dickerson

Great. Thanks so much.

Just a couple of easy ones from me. I guess going back to the question just asked around cost inflation and some of the levers, just kind of more generally speaking, if I look at the company, namely Atkins I guess historically, I don’t feel like you really pulled the pricing lever much, but it's been about attracting new buyers. And you've obviously and currently attracted a lot of buyers.

So growth has been impressively driven by volumes.

So as you think about kind of just the cost equation, vis-à-vis recovery, is that something you kind of sit there in a few months as you think forward next year and start to consider some pricing changes as long as the category seems to be pricing as well, or do you kind of have to tiptoe through this to make sure that you're obviously capturing the full recovery as it comes? That's a first quick question.

Joe Scalzo

Yes. Rob, I think first, our strategy is pretty simple, maintain our gross margins in the marketplace.

So we make significant marketing investments, maintaining our gross margins and slightly improving it with cost savings opportunities is our long-term strategy.

We have priced on Atkins when we've needed to from an inflation standpoint.

So Todd's comment was one more of we've been managing inflation to neutral over the last few years and haven't had the need to do that. But if we see significant inflation, looks, feels inflationary as we move into fiscal '21, we wouldn't hesitate the price. Exactly externally what's going on, obviously, it's easier when other people are pricing around you to settle on a price increase to customers, so there's always easier environments than leading and clearly some of that's going on right now. But we're justifying it. We would justify it based upon the fact that we're seeing inflation.

We have a strategy of holding margins. We would be encouraging retailers to take price at retail and not to squeeze their own margins and make the movements we need to make in order to hold our gross margins flat, and then any cost savings we have kind of fall to the bottom line.

Rob Dickerson

Okay, got it. It makes sense. And then secondly, just on the trade promotional flow as we get to this year and maybe into next year, again, it sounds like you're kind of getting back to more normalized rate. Is there kind of anything strategically you kind of think about that you can do to either increase display or run LTOs or what have you kind of as the mobility increases just to make sure you're essentially front and center that consumers face as they start to walk through Walmart a little bit more?

Joe Scalzo

Yes. Look, I feel pretty confident we benefit from one of the more experienced sales teams in the industry.

So I feel real confident in our ability as a team to sell in display activity, especially as people are reemerging from reduced mobility.

So, second quarter was a good example. We did an excellent job of executing display across the board, pretty much across food, drug and mass, did a terrific job. I feel pretty confident. We can see third quarter plans right now. They're pretty well locked. I feel really confident of where we'll be in the third quarter from a display activity standpoint. And we're still doing the planning and executing for the fourth quarter. But we've got a top notch sales team. We're really good at selling in display. And then I think one of the things retailers learned as part of COVID is the big brands matter in categories, make sure you get those right, make sure you get those brands on display to drive foot traffic into the aisle.

And so we're taking advantage of those changes and I think evolution of customer thinking, and we're using that to drive display on both of our brands.

So I feel pretty good about where we are and where we will be as we move through the third quarter.

Rob Dickerson

All right, great. And then I guess just lastly kind of the question maybe somebody asked [indiscernible] just in terms of the acquisition appetite, I know you've said historically continue to have a decent pipeline looking for something maybe not as large as Quest, but probably still on healthy snacking. Is there any kind of new perspective on that just in terms of -- obviously can't speak to timing, but my assumption is nothing's changed, pipeline’s good and we're always looking for opportunistic buys? Thanks. That’s it.

Joe Scalzo

Yes, I think that's true. And we would highlight that we’re encouraged by our debt buy down from the debt we took long for the Quest acquisition.

So we've shown this business model, deleverage is pretty quick. And then we're looking for assets in the space that we're in, and probably what's most important to us is the brand.

So what is the brand promise? Do they have a defined consumer target? Have they made progress against that target? We look for strong consumer brands with good innovation pipelines and a strong understanding of who their targets are.

And so we found one of those at Quest and we're constantly on the lookout for the next one.

Rob Dickerson

All right. Thanks so much, Joe. I really appreciate it.

Joe Scalzo

All right. Have a good day, Rob.

Operator

The next question is from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Alexia Howard

Good morning, everyone.

Todd Cunfer

Good morning.

Joe Scalzo

Hi, Alexia.

Alexia Howard

So I remember that one of your hopes for the Quest deal was the potential to expand the product range in some of the mass market outlets, particularly Walmart. I imagine that the pandemic kind of limited the ability to do that last year.

Just wondering where you are on that path and your ability to get the view count on Quest up in those channels. And then I have a follow up.

Joe Scalzo

Yes, Alexia, good question. We've made progress certainly in food on Quest and in target on Quest. Walmart continues to be a little bit of a challenge at resetting once a year, so you're kind of locked and loaded, which you get in the fall. And it has been impacted by some loss in distribution of our shake business.

So we've seen some shake declines just based upon the performance of shake in Walmart stores through the previous 12 months. We're optimistic that we're going to make progress across the board. The numbers of items in distribution on Quest against the size of the business in food, drug and mass, there is whitespace. And as I said before, we have a pretty talented sales organization, terrific leadership. We’ll close those gaps over time, I'm confident of that. And obviously, where we've been innovating on Quest, we had incredible success.

Our chip business is probably the best example. Six-month business is at 50 million in revenue already, so pretty significant success. The innovation pipeline is pretty good. I would expect us to continue to build value on Quest over time in distribution.

Alexia Howard

Great, thank you. And then as a follow up, the dive down in gross margins for the full year, before you were saying flat.

Now I think you're saying slightly down. Would you attribute that mainly to the higher than expected input cost in freight inflation or is it more that the promotional activity is having to step up more than you'd anticipated? I'm just curious about the retailer environment and whether the retailers are asking for more at this point. Thank you. And I'll pass it on.

Joe Scalzo

Sure. There's three pieces of it and they're all pretty small, but they add up to our language changing from flattish to slightly lower.

So we're not anticipating a significant change in our gross margin outlook, but we want to call out that it was going to be a bit lower than we originally planned. It's really not trade related.

Our trade expectations are the same. We wanted to have very strong merchandising activity. We've had it. We knew we wanted to get back to normal levels in the second half. We're doing that.

So really nothing on the trade, which has changed our view. It's really three components. One, slightly higher input costs, nothing significant, but a little bit of pressure there.

Second one is brand mix. Quite frankly, Quest is growing much faster than Atkins right now. And as you know, Quest has slightly lower gross margin.

So there's a bit of a brand or product mix impact there. And the third component, again, not huge, but a little bit of an impact is channel mix, as brick and mortar has been slower to rebound than we had originally anticipated. E-comm has not slowed down.

In fact, it has accelerated in Q2 and we anticipate it will be strong in the second half. That will get a little bit of a margin hit as well. Again, all three of those things individually are very, very small, but together a little bit of an impact for the year.

Alexia Howard

Great. Thank you very much. I'll pass it on.

Operator

Thank you.

Your next question is from the line of Eric Larson with Seaport Global. Please proceed with your questions.

Eric Larson

Okay. Thanks, guys. Thanks for the question. Joe, in your prepared comments, you talked a little bit about reacceleration of foot traffic at the mass channel level. Can you give us a little bit of cadence what is the rate of change and then how quick is that? And then if you can put that into some kind of historical perspective, is traffic at the mass channel 80%, 85%, 90% of what it was pre-COVID? I'd suspect that that would be a big positive for the active brand.

Joe Scalzo

Yes, big pretty much consistently through COVID foot traffic, mass down double digits. And they obviously were making it up in baskets, so bigger basket. But when people came to -- let me step back, it's probably helpful to understand the total context. COVID constrains people shopping behavior by limiting the number of stores they visited, and for the most part moved people down to smaller formats.

So grocery tended to benefit more than mass did, right? So smaller stores versus bigger stores. And I think it was just safety concerns.

So mass saw declines in foot traffic that pretty much didn't change throughout, from the beginning of COVID through the second quarter of this year, foot traffic down. But because people were not eating out, obviously, more meals, the basket when people were shopping were bigger.

So retailers like Target, Walmart benefited from bigger baskets, but fewer shopping trips and fewer shoppers.

So as we move into the third and fourth quarter, obviously those retailers start anniversarying those pretty significant declines in foot traffic, and we're starting to see improving trends year-on-year. I would expect those trends to continue. Even without improvements in mobility, I would expect those trends just over easier comparables to improve. And that obviously benefits both of our brands, but it certainly benefits Atkins, given the importance of the mass channel to Atkins business.

Eric Larson

And will your buy rates be better with more foot traffic as opposed to a larger basket size, if that makes sense?

Joe Scalzo

That's a great question. And to tell you, I don't have enough quantitative data to tell you that. Intuitively, you would think your buyer behaviors would be more buyers, given the importance. Walmart is 30% plus of Atkins business. I would think buy rate would be impacted as well as buyer flow. But I don't have any historic data to be able to tell you that, right? So we haven't had a buyer flow issue in the brand since September. And we know that buy rates going to correlate to being back at work and back to transit.

So I think mass merchant improvement foot traffic should help consumption. We do think that's the case. But we haven't forecasted for a lot of that at this point. We just assume mobility is the same and pointed to the fact that we got easier comparables, better foot traffic and we should see improving consumption just based on those factors.

Eric Larson

Okay, thanks. That's really helpful in your clarity.

So the final question is, and this question has already been asked in a different form, but it sounds like in your studies of buying patterns for Atkins, it sounds like you've learned something new about Atkins given the consumption patterns with driving to work or at work behavior? Again, does that change the way you market the brand a little bit? Rob Lowe is not necessarily someone that needs weight management control.

So you've positioned it differently. But you've learned something there. Does that change how you market the brand or position it?

Joe Scalzo

Well, first, I would say that the mobility data was very helpful for both brands.

So we understood -- our belief prior to the data was general mobility will help us. What we've learned now back to work, back to school, in transit, really important to bars and to a lesser degree shakes on both of our brands.

So that was an important component to it.

So understanding that, obviously, that's a consumer insight. And obviously, as we look to market our brands, we will leverage that as an insight from a consumer standpoint. Absolutely.

Your question about Rob, we have changed the positioning of Atkins from a fast weight loss diet brand to a weight management brand. And we think Rob is the perfect embodiment of that. And the reason we did that was quite simple. The size of the target audience, about 8 million diet fast weight loss consumers in the U.S., about 33 million weight management consumers in the U.S. interested in low carb, so much bigger target audience and the brand has enjoyed that improving consumer penetration around the bigger -- repositioning around the bigger audience.

So we like Rob, we're going to continue to leverage it.

Eric Larson

Okay, perfect. Thanks, Joe.

Operator

Thank you.

Our last question comes from the line of Ryan Bell with Consumer Edge Research. Please proceed with your questions.

Ryan Bell

Hi, everyone.

Joe Scalzo

Good morning, Ryan.

Ryan Bell

With the increased move to confections and snacking, or what you're calling the snackier side of your portfolio, is that expansion due to those who are already consuming Atkins and Quest products, or is that largely from those outside the brand families kind of seeing if it's a deepening of existing consumer pace or the degree to which there's some incremental consumer expansion going on that might benefit as we come out of some of the on-the-go restrictions?

Joe Scalzo

Yes, great question.

First, I would rebrand it from snackier to everywhere, every time products, right? So what we learned is that they don't correlate at all to [indiscernible] which is really encouraging. It says that as we people start becoming more mobile and I have no impact at all on consumption of these products.

So that's good news for us. And as is the case in most things as it pertains to brand and product, it's a little of both, right? They're really good at driving new people to the brand and they're really good at driving buy rate among existing.

So we see them as both, and the data would suggest that they are both.

Ryan Bell

Okay, that's helpful. I know you answered one question on acquisitions after [ph] you’ve deleveraged as much as you have. But is there anything that you'd be looking for medically to add to your portfolio? Maybe some plant-based products, something that's more of the anytime occasion, some channel expertise or is there anything else that you'd find useful to add to the arsenal?

Joe Scalzo

Strong consumer brands, well defined consumer brands, well defined consumer targets, underpenetrated opportunities to grow.

So Quest is a great example of the type of business that we seek.

Here's a brand that has shown strong consistent growth over time. It was well defined from a brand standpoint. It had a well understood consumer target and the opportunity for Quest was it was relatively unknown, relatively low aided and unaided consumer awareness.

So the ability to use our marketing expertise to build brand awareness to drive consideration and prove trial and then conversion, those are the types as opposed to I want to be in this segment or I want this type of product. It's more about I think, from our standpoint, consumer and brand than it is anything else. And they're hard to find. And when you find them, you got to grab them.

So that's what's on our hunting list. And Quest was possibly the best brand in the category from that, and we're showing that right now in its growth rates, its trajectory, its ability to expand beyond protein bars, its ability to expand beyond kind of specialty channels, to food, drug and mass to other snacking products, the brand promise, the target audience -- the ability to target folks and get them and build trial and penetration on the brand was showing that it was a pretty good profile and we made a good choice.

So that's what we're looking for more than any particular segments or products.

Ryan Bell

Great. Thanks for the context. That's it for me.

Operator

Thank you. This concludes our question-and-answer session. And I'll turn it back to Joe Scalzo for closing remarks.

Joe Scalzo

Thank you. Thanks again for participating on today's call.

We have continued to remain safe and we look forward to updating you on our third quarter results in July. We hope all of you have a good day. Thank you.

Operator

This will conclude today's conference.

You may disconnect your lines at this time. Thank you for your participation.