Earnings Call Transcript
Simply Good Foods Co (SMPL)
Earnings Call Transcript - SMPL Q2 2022
Operator, Operator
Greetings, and welcome to The Simply Good Foods Company Fiscal Second Quarter 2022 conference call. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Pogharian, Vice President of Investor Relations for Simply Good Foods Company. Thank you, sir. You may begin.
Mark Pogharian, Vice President of Investor Relations
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 26, 2022. 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 website. This call is being webcast, and an archive of today's remarks will also be 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. Due to 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 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, President and Chief Executive Officer
Thank you, Mark. Good morning and thank you for joining us. Today I'll recap Simply Good Foods' second quarter results, and I'll provide you some perspective on the performance of our brands. Then Todd will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and your questions. In the second quarter, we delivered strong net sales and earnings growth that exceeded our expectations and positioned us well to deliver on our full-year objectives. U.S. retail takeaway in the quarter was in line with our expectations and similar to Q1, despite the surge in COVID cases from the Omicron variant. Price increases instituted in our fiscal first quarter of this year are tracking in line with our expectations and were a high single-digit percentage contribution to our sales growth. Net sales increased 28.7%, driven by retail takeaway and the timing of shipments. Specifically, Q2 POS increased 19.6% in the U.S. measured channels of IRI MULO and Convenience Stores. As is typically the case during this time of year, trade inventories grew during the quarter in support of seasonal in-store merchandising. Q2 sales growth also benefited from the timing of shipments to support earlier than expected Q3 customer programs. We also estimate that the storms that negatively impacted sales in the year-ago period contributed about a two percentage point benefit this quarter. Adjusted EBITDA in the second quarter increased 27.1% to $54.2 million, primarily due to the sales growth and G&A leverage. As expected, gross margin declined 250 basis points versus the year-ago period. Higher supply chain costs were partially offset by the price increase and favorable mix. And while still facing a challenging supply chain operating environment, customer service performance improved during the quarter. While we're not at target service levels, our performance has improved during the first half of the year. We're pleased with our progress in a continuing difficult environment. We executed well against our priorities in the second quarter to ensure we deliver on our short and long-term objectives. We are focusing on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment. As such, due to lingering supply chain cost inflation, which we expect to continue into fiscal 2023, earlier this week, we notified customers of a price increase effective in our fiscal fourth quarter. Additionally, in March, we entered into an agreement to license the Quest frozen pizza business to Bellisio Foods, which has held the license for Atkins Frozen Meals for several years. Simply Good retail takeaway in measured channels increased 19.6% despite the significant surge in cases from the Omicron variant that was dominant during the quarter. Both our brands have outperformed their respective sub-segments of weight management and active nutrition. In Q2, the weight management segment was up 0.4%. Atkins outperformed the segment with retail takeaway up 6.4% over the same timeframe. Total Quest retail takeaway in measured channels in Q2 was up 40.1%, outpacing the Active Nutrition segment growth of 20.5%. We estimate U.S. retail takeaway in unmeasured channels, primarily e-commerce and specialty, increased low double-digits on a percentage basis versus last year. The growth rate in unmeasured channels moderated due to strong performance in the year-ago period. Atkins Q2 U.S. retail takeaway in measured channels increased 6.4%. This increase benefited from improvements in the mass and club channels, as well as continued total buyer growth. Atkins growth and total buyers in the quarter remained strong, up double-digits on a percentage basis versus the year-ago period. However, the buy rate remains mid single-digits below historic levels due to fewer snacking occasions from the high correlation between consumption of Atkins bars and the workplace. Therefore, the return to pre-pandemic routines continues to be a big opportunity for the brand. Atkins shakes Q2 retail takeaway was up 11.7% with solid growth across all major retail channels. Q2 bar consumption was up modestly versus the prior year. Growth slowed a bit from the previous six months due to the impact of the Omicron variant that the CDC reported infected over 20 million adults in January alone. Atkins all other product forms continued to show strong growth, including confections, cookies, and chips. In Q2, Atkins all other retail takeaway increased 9.8%, driven by cookies, and contributed about 2.6 percentage points to Atkins total brand retail takeaway growth. Confections POS was slightly lower as we lapped last year's successful dessert bar launch. Performance of key customers was solid for Atkins retail takeaway, which increased across all channels. We're particularly pleased with Q2 mass channel retail takeaway of bars and shakes, which increased 7% and 10% respectively. Our Atkins e-commerce business is also doing well, with Amazon, Atkins' second largest customer, seeing a Q2 retail takeaway increase of about 20% on a percentage basis versus the year-ago period. Let me now turn to Quest, where Q2 retail takeaway increased 40.1% in the measured IRI MULO C-store universe, outpacing the Active Nutrition segment. Growth versus the year-ago period was driven by an increase in household penetration, a rebound in bars, and success in new product forms. Quest bars Q2 retail takeaway increased 22%, driven by higher shopper trips versus the year-ago period in C-stores and mass channels. Quest's snack category, about 40% of total Quest U.S. retail sales, continued to do well, increasing 88% in Q2, driven by strong growth of chips, cookies, and confections. We continue to see robust growth across all these forms. We had another good quarter of growth across all key retail channels, with increased foot traffic in the mass channel and convenience stores driving combined Q2 POS growth in these channels of nearly 45%. Quest e-commerce takeaway increased about 14% versus last year. As expected, due to strong performance in the year-ago period, the growth rate moderated from previous quarters. In summary, we are pleased with our second quarter results that were better than we expected. Over the remainder of the year, we anticipate that retail takeaway will continue to be solid. Although, as we mentioned previously, the growth rate in the second-half of the year is more challenging due to more difficult year-over-year comparisons. We have a good balance of innovation as well as in-store merchandising and programming that we believe will enable us to deliver on our retail takeaway targets. Due to the timing of Q2 shipments discussed earlier, we expect net sales growth in the second-half of the year to be less than the retail takeaway increase. Additionally, given the unknown timing of when employees will return to the office and the unpredictable nature of COVID-19 over the remainder of the fiscal year, we don't anticipate any meaningful improvements in workplace mobility. Our customer service levels are improving, but we anticipate that the supply chain operating environment will remain challenging. We have good visibility into our cost structure for the balance of the fiscal year, and our input costs are largely covered. Therefore, there is no meaningful change to our fiscal 2022 supply chain cost inflation or gross margin outlook. The price increase announced earlier this month is primarily a benefit in fiscal 2023. We're executing well against our plans, and we believe we are in a position to deliver another year of solid net sales and adjusted EBITDA growth as a path to increasing shareholder value. Now I'll turn the call over to Todd to provide you some greater details in our financial results.
Todd Cunfer, Chief Financial Officer
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 28.7% to $297 million. North American net sales increased 31.5%, and was primarily driven by volume. As Joe stated, we estimate that pricing was a high single-digit percentage point contribution to our sales growth. The international business declined 25.1% due to the European business exit, with core international net sales growth at 6.1%. The European business exit was a 1.5 percentage point headwind to total company net sales growth. Moving on to other P&L items, gross profit was $108.5 million, an increase of 20.2%. Gross margin declined 250 basis points to 36.6% and was in line with our expectations. The gross margin decline was driven by the previously discussed supply chain cost inflation, partially offset by pricing and favorable product form and retail channel mix. As Joe mentioned, over the remainder of the year, we have good visibility into our cost structure and our input costs are largely covered. In the second-half of the year, gross margin is greater than the Q2 seasonal low and is anticipated to be in the 37.5% to 38% range for Q4, greater than Q3. Adjusted EBITDA increased 27.1% to $54.2 million due to higher sales and G&A leverage. Selling and marketing expense increased 22.2% to $32 million, driven by higher brand building initiatives on both brands. Note that the ramp-up of marketing expense in the second-half of fiscal 2021 impacts the marketing cost in fiscal 2022. We expect marketing expense this year to increase mid to high single digits with substantially all of the growth in the first-half of the year. G&A expense excluding integration and restructuring expenses, as well as stock-based compensation increased 4.8% to $22.9 million. Lower costs related to the European business exit were more than offset by higher professional fees and the timing of research and development spending. We anticipate solid G&A leverage this year and expect it to be higher in the second-half of the year due to the timing of when we began to accrue incentive compensation in fiscal 2021. Moving to other items in the P&L, interest expense declined $2.7 million to $5.3 million due to the re-pricing of a term loan in the second quarter and pay down of term loan debt. In the second quarter of fiscal 2022, the non-cash charge related to the re-measurement of our private warrant liability was $12.7 million versus a loss of $45.3 million in the year-ago period. As previously disclosed on January 2, 2022, the private warrants were exercised on a cashless basis. Our statutory tax rate in Q2 excluding the charge related to the warrant liability was about 25%. Net income in Q2 was $18.5 million versus a loss of $26.2 million in the year-ago period. Year-to-date results are as follows: Net sales increased 25.2% to $578 million. The drivers of this growth are similar to Q2. Gross profit was $225.1 million, an increase of 22.1%. Gross margin is 38.9% and declined 100 basis points versus the year-ago period. Adjusted EBITDA increased 31.2% to $120 million, primarily due to the higher gross profit. Selling and marketing expenses increased 21.7% to $2.5 million, driven by higher brand building initiatives. G&A expenses increased 3.6% or $1.5 million, excluding charges related to integration expenses, restructuring expenses, stock-based compensation, and other expenses. Moving to other items in P&L, interest expense declined $4.7 million to $11.6 million due to the re-pricing of the term loan and the pay down of the term loan debt. The year-to-date non-cash charge related to the re-measurement of our private warrant liabilities was $30.1 million versus $24.9 million in the year-ago period. The year-to-date statutory tax rate excluding the charge related to the warrant liability was about 25%. We anticipate the full-year fiscal 2022 tax rate to be about 26% versus our previous estimate of 27%. Net income was $39.6 million versus $16.7 million in the year-ago period. Turning to EPS, second quarter reported EPS was $0.18 per share diluted compared to a loss of $0.27 per share diluted for the comparable period of 2021. In addition to the previously mentioned warrant liability impact, in Q2, depreciation and amortization expense was $4.8 million and similar to the year-ago period. Stock-based compensation of $3.1 million increased $0.6 million versus last year, while costs associated with Quest integration and restructuring was $0.3 million versus $2.2 million last year. Adjusted diluted EPS, which excludes these items, was $0.36, an increase of $0.11 versus the year-ago period. Note that we calculate adjusted diluted EPS, as adjusted EBITDA, less interest income, interest expense, and income taxes. Year-to-date reported EPS was $0.40, and adjusted diluted EPS was $0.79. Additionally, the calculation of adjusted diluted EPS in Q2 assumes fully diluted shares outstanding of $102.4 million versus $100.4 million under GAAP. The difference is due to the exclusion of the private warrants in fully diluted shares outstanding under GAAP as the private warrants were previously a liability on our balance sheet. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow in the second quarter, net cash provided by operating activities was $37.7 million, an increase of 53% versus the year-ago period. Year-to-date, net cash provided by operating activities was $30.3 million. We anticipate full-year fiscal 2022 cash flow from operations will be about the same as last year due to the timing of tax payments versus the year-ago period. As of February 26, 2022, the company had cash of $51.5 million. The outstanding principal balance of the company's term loan debt was $431.5 million, and the trailing 12-month net debt to adjusted EBITDA ratio was 1.6 times. During the second quarter, the company repurchased $20.4 million of its common stock at an average cost of $35.68 per share. As of February 26, 2022, approximately $27.5 million remained available under the existing stock repurchase authorization. We anticipate GAAP interest expense to be about $23 million, including non-cash amortization expense related to the deferred financing fees. This is less than our previous estimate of about $25 million, due primarily to the re-pricing of our term loan. Capital expenditures in the second quarter and year-to-date period were $1.6 million and $6.3 million, respectively. Full-year CapEx is expected to be about $6 million. I would now like to turn the call back to Joe for closing remarks.
Joe Scalzo, President and Chief Executive Officer
Thanks, Todd. The strong results in the first half of the year position us well to deliver on our full-year objectives. In the second half of the year, we have marketing customer programming and innovation plans in place to continue to drive sales growth and retail takeaway. This gives us confidence to increase our full-year net sales and adjusted EBITDA outlook. Our forecast does not include any meaningful improvements in workplace mobility and assumes that we will continue to perform well in navigating the challenging supply chain operating environment. Looking at the key metrics of our updated full-year fiscal 2022 outlook, we expect net sales to increase 13% to 15% versus last year. This includes a two percentage point headwind related to the European business exit and the licensing of the Quest frozen pizza business. There is no change to our gross margin outlook. We continue to anticipate supply chain cost inflation and expect gross margin to decline about 250 basis points versus last year. Adjusted EBITDA is anticipated to increase slightly less than the net sales growth rate. We continue to expect that marketing expense will increase versus last year, although at a lower rate than the net sales increase. Additionally, we anticipate significant G&A leverage, and the decline in interest expense should result in adjusted diluted EPS growing faster than adjusted EBITDA. A couple of things to note in the second half of the year: Our comparisons are more difficult, and we expect retail takeaway to increase low double digits versus prior year. Net sales growth will lag retail takeaway due to the first-half trade inventory build. As we stated in January, we anticipate year-over-year performance across key financial metrics to improve from the third quarter to the fourth quarter. We're excited about the growth opportunities that exist within our business and the category. We're executing against our strategy and increasing household penetration that should continue to drive short- and long-term sales and earnings growth. A strong balance sheet and cash flow generation enables us to invest in our business, evaluate M&A opportunities, and opportunistically buy back shares of our stock as part of our path to increasing shareholder value. We appreciate everyone's interest in our company, and we're now available to take your questions.
Operator, Operator
Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Jason English, Analyst
Hey, good morning, folks. Thanks for slotting me in. A couple of questions, first, on top line. I believe your guidance for the back-half of the year implies sales growth of low to mid single digits, which seems a lot lower than I would expect given the momentum in the business, but maybe you can unpack some of the puts and takes? Yes, oh, go ahead, I'll let you run with it. Go with it.
Todd Cunfer, Chief Financial Officer
Yes. So, I mean the high-end of the guidance is around 6.5% net sales growth for the back-half. So, we have about two points because of the European exit; we licensed the pizza business. So, that's about a two point negative impact to the second-half. That gets you to about 8.5% at the high-end. Obviously, we built inventory in the first-half. Some of it was, we exited the year a little bit light, we built some of that back in Q1, more in Q2, we had some key customers who wanted the shipments earlier than normal. There were normal March shipments that occurred in February for some spring activity. And then, don't forget, we had that storm, Texas storm last year that ripped through the country right at the end of our Q2 last year that took about two points of growth out of Q2 into Q3. So, the question is how much of this de-load is going to stick and how much is going to stay, or leave us here. Most of it is going to go away. So, there's probably at least five or six points of that de-load that's going to impact the second-year. So, if I take the high-end at 6.5%, I add the two points to get to kind of an organic 8.5%, and then there's a five or six points of a de-load. That's why we're saying POS is probably going to be in the low double-digits in the second-half. Hope that helps.
Jason English, Analyst
No, it's super helpful. Thank you. And the statistics on Quest, 55% now bars, correct me if I'm wrong, but I think if we rewind the clock to maybe 2018 or so, it was around 80% bars-driven. So, the contribution from these other forms has been meaningful. Can you replicate that on Atkins? What are the early results telling you with cookies and chips now that they're in market? Can they have similar success, or should we temper our expectations, given the weight management set?
Joe Scalzo, President and Chief Executive Officer
Well, if we consider that bars and shakes are the core of both brands, we've already expanded this on Atkins; our confection business constitutes about 25% of the Atkins portfolio. So, to your question about whether we can exceed that 25%, I believe the answer is yes. We're still in the early stages with cookies on Atkins, and they seem to be performing well. We’ve just started shipping chips, which is too early to assess, but we have sufficient consumer data related to our salty snack offerings to know that Atkins consumers will likely find these products appealing. We're quite confident about this. In fact, we anticipate that other forms, beyond bars and shakes, will increasingly represent a larger part of our portfolio.
Jason English, Analyst
Helpful, I appreciate it. I'll pass it on.
Operator, Operator
Thank you. Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please proceed with your question.
Kaumil Gajrawala, Analyst
Sorry about that, guys. Is that better? I'm in an airport.
Todd Cunfer, Chief Financial Officer
Yes. Yes, we hear you.
Kaumil Gajrawala, Analyst
Great. May I ask, the first question maybe just on the mechanics of your input cost coverage for the year? Is it mostly financial hedges, or contracts on supply? And I guess the reason why I ask is in such a strange environment, is there risk of things like force majeure, or the caps may be on certain inputs that we should be paying attention to?
Todd Cunfer, Chief Financial Officer
Yes. So, no financial contracts; it's just normal, we contract either with our co-manufacturers or directly with ingredient suppliers. We're highly confident that we're going to get the ingredients; we are over 90% covered now for the year. So, we feel very, very good about where we are from an input cost perspective.
Kaumil Gajrawala, Analyst
Okay, great. And then a follow-up on the share repurchase. Does that indicate or say anything about how you're feeling about the M&A environment, M&A opportunity?
Todd Cunfer, Chief Financial Officer
Yes. No, let me just step back for a second. Two years ago, we had leverage over four times when we purchased Quest. So, job number one was to de-leverage our balance sheet. So, we ended this quarter down to 1.6 times, a very, very comfortable place to be to do M&A, potentially continue to pay down debt, or to opportunistically buy some shares. So, we're very active in looking at M&A opportunities. We saw the stock pull back just with the craziness of the stock market; we bought in the $35 range, very attractive prices in our view. So, we now just have the capital allocation flexibility to remain active in M&A to continue to pay down term loan, or if the shares remain at attractive levels, we will not hesitate to buy more stock.
Kaumil Gajrawala, Analyst
Okay, great. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Rob Dickerson, Analyst
Thank you for taking my question. I wanted to inquire about the incremental pricing. Initially, it seemed like the expectation for the year was around 6% or more. You mentioned in your prepared remarks that Q2 saw a high single-digit increase, and it looks like there's another round expected towards the end of Q4. I'm curious about the rationale behind the need for additional pricing despite being covered. Was it a decision based on potential or actual performance, given that pricing has been strong? Additionally, any insight on the scale of this pricing as we look ahead to next year would be appreciated.
Joe Scalzo, President and Chief Executive Officer
Yes, Rob, thanks. First, we're sitting at gross margins, experiencing 250 basis points erosion this year in gross margin with a stated target of trying to have gross margins around 40%. We believe that's a competitive advantage for us. It provides us the necessary marketing support to drive household penetration and growth in our business. So, we're in the middle of the year and below our own expectations. So, inflation exceeded our expectations this year. Our pricing and cost savings were insufficient to hold gross margin. As we look at the environment, as we said in our prepared remarks, we see that cost inflation is going to continue based on our view right now. So, the combination of where we are today didn't take enough pricing this year and the environment we see as we move into fiscal '23 will continue to be inflationary. Therefore, we need to move forward and take a second price increase. That price increase will have minimal impact on this fiscal year and is more about as we move into the first-half of next year.
Rob Dickerson, Analyst
Okay, fair enough. And then, just kind of a general question for you, Joe. I know, you know, for some time, you've been factoring in no real improvements in consumer mobility, which I fully understand, but for sitting here now, early April. The direct question is, is there anything that you've seen coming through March that could suggest some positive potential in terms of increased mobility expectations, or again, it's just like way too early to tell, and you just kind of find keeping it flat on go-forward? That's all.
Joe Scalzo, President and Chief Executive Officer
Yes, I think going forward it's really difficult to see how this is going to play out. So I would have told you that, when we're sitting in October-November, we were in pretty good shape from a COVID perspective. You know, the variant hit, 20 million people had reported cases of the new variant. We weren't locked down, but we certainly weren't people out and about like they were prior to that. So, we're really reluctant to declare victory on COVID and to say that companies will go back to closer to what they were prior to the pandemic, just because it's been very, very difficult to predict. So, we're taking a conservative view on it. As it pertains to back to work, we are seeing some positive signs; Q2 had the business that was most affected being the Atkins bar business. We actually saw from Q1 to Q2 improvements in the buy rate on bars. Certainly not back to full potential, certainly a lot of opportunity, but as companies started to go back to work, the number of bar snacking occasions went up, and we saw the buy rate on Atkins bars improve, but still not where we want it. However, we did see that correlation in the second quarter. So again, I think conservativism, as we think about the second half of this year is appropriate, given what we've experienced over the last two years. This correlation factor on snacking and work on bars appears to be correct, so we feel fairly confident that as companies go back to the way they looked pre-COVID, our bar business will certainly pick up.
Rob Dickerson, Analyst
All right, super. Thanks, Joe.
Operator, Operator
Thank you. Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
John Baumgartner, Analyst
Good morning, thanks for the questions. I guess, first of all, Joe, just hoping to hear your thoughts in terms of merchandising at retail. I mean, the Nielsen data shows a pretty striking drop-off in distribution points really across the board for general merchandise categories. And even across health and beauty care, TDPs are down for everything other than vitamins. I mean, to what extent do you see the weight management and active nutrition categories benefiting from this in terms of incremental space visibility during the next sales cycle, shelf resets, and moving forward?
Joe Scalzo, President and Chief Executive Officer
Yes, I'm interested to hear your observation on that. I had not heard that before. Our points of distribution on both brands have increased significantly since the beginning of the fiscal year. I don't think, John, it's coming from expansion of our category into other space; I think it's just competitive pickup. We gained some space, while somebody else lost some space. For the most part, it's been driven by two factors: first, during COVID, retailers understood the importance of bigger brands, key flagship brands in the category to attract foot traffic; and second, we have a pretty good innovation pipeline, so enough new interesting items to gain incremental space. So, I hadn't heard that the loss of TDPs in other categories benefitting our category.
John Baumgartner, Analyst
Okay. And then, as a follow-up, coming back to Jason's question on the cookie side. I think Atkins is run rating something like north of $20 million annualized Nielsen right now. That approximates what Quest did in its first year, I think going back to 2018. What are your early reads in terms of incrementality from new customers and consumers, and any degree of cannibalization from cookies impacting confections, brownies? And given the start you're seeing even, salty snacks for Atkins as well, is there anything that would sort of inhibit growth or glide path from here in terms of capacity constraints, or anything related to slotting at the retail? Thank you.
Joe Scalzo, President and Chief Executive Officer
Yes, your analysis on cookies is consistent with ours on the opportunity size. We are facing some constraints in cookie production right now due to staffing issues at the co-manufacturer, but we're managing around those on both businesses, frankly. I don't expect this to be a long-term drag on the business. I'm very optimistic about the opportunity in all other forms. If you think about it in terms of usage occasions, we've done a really nice job of penetrating those use occasions and will continue to grow in those categories as we grow total buyers. The real opportunity I think going forward is our ability to capture different use occasions in different states in different snacks. I was looking at some data on the Quest business before, and we're starting to gather new buyer data. About half the new buyers on Quest are coming from bars, and half are coming from non-bars. This tells us we have ourselves a lifestyle brand that transcends a single form, and we've got a suite of products that fit into many different lifestyle states and use occasions, which is a powerful thing and consistent with what we've experienced on Atkins. So, we're very optimistic; our pipeline is full of technology and products that will enable us to explore these other snacking states and products.
John Baumgartner, Analyst
Great. Thanks, Joe.
Operator, Operator
Thank you. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.
Cody Ross, Analyst
Hey, good morning, folks. Thanks for taking our question. Your sales came in better than expected this quarter. Did you quantify how much of that was due to the timing of shipments?
Todd Cunfer, Chief Financial Officer
Yes, if you look at the POS growth, it was about, in North America, about 19%, while the North American business grew around 30%. So, there was definitely approximately a 10 point contribution from timing.
Cody Ross, Analyst
Got it. And then, you guys raised.
Joe Scalzo, President and Chief Executive Officer
Just so we're clear, some of that inventory was made to compensate for low inventory levels going into the year. Some of it's timing, and that's the art and the science of figuring out the second-half of the year. What's going to stick, and how much is going to come out. We have a growing business. Customers try to keep the weeks of inventory pretty consistent, but as you grow the size of the business, weeks of inventory gets bigger. So, as we've provided our guidance for the second-half of the year, we've given our best estimate of how much is going to stick and how much is timing.
Cody Ross, Analyst
Understood. Piggybacking on that, how much inventory are retailers carrying right now? And how much do you expect them to carry going forward, if you have any visibility to that?
Todd Cunfer, Chief Financial Officer
We ended the year low. If you remember our fourth quarter last summer, that’s when all the supply chain logistic issues were starting to occur with us and our peer group. So, we struggled to fulfill orders, so we ended August with lower retail inventory levels. We built some of that back in Q1 and more in Q2; we added a week or two. Typically, retailers will carry four to six weeks of inventory, and we are a little bit higher than normal. Most of it will come out in the typical season we’ve made our best guess, but we’ll see where we land.
Cody Ross, Analyst
Got it. And then last one if you don't mind me sneaking it in, our recent conversations with investors suggest some thought that your gross margin outlook might be conservative. Given your raised sales this year slightly 1% at the midpoint, but you held gross margin guidance. Why is that?
Todd Cunfer, Chief Financial Officer
Yes, we took the hit on gross margin outlook in our January call, right? We wanted to make sure we did not change it again. Commodities have not pulled back, but we're covered for the year. We feel very confident in January and feel more confident now that that minus 250 is a pretty good number. So, I don't view that number as conservative. The costs are real, but we're covered.
Cody Ross, Analyst
Great, thank you.
Operator, Operator
Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Please proceed with your question.
Unidentified Analyst, Analyst
Hi, guys, good morning. If I can ask a couple questions on the consumer side of things, have you guys seen any consumer pushback on the price increases that you've put in so far? Any demand elasticity just so that you're seeing in the channel? And then, if no, how do you guys feel about the fourth quarter price increase? Do you have any concerns around demand structure a bit?
Joe Scalzo, President and Chief Executive Officer
Yes, first of all, consumer response to our price increase in September has been better than we expected. Volume has been generally stronger, which aligns with what many other food companies are experiencing. We are also noticing the rise of private label products, indicating that consumers may be becoming more price conscious, likely due to the ongoing economic climate and increasing costs. With the current economic situation, there is concern regarding future inflation. As we consider our pricing strategies, we remain mindful of consumers' financial perspectives. However, we need to maintain our profit margins, so we are adjusting prices to cover commodity costs while being cautious in our estimates of demand elasticity as we progress.
Todd Cunfer, Chief Financial Officer
Just one clarification, Joe mentioned private label, which is spot on. We are seeing private label broadly do better in the food space, but this category has very little private label, so there’s not a concern on our end.
Unidentified Analyst, Analyst
Okay, great. If I can actually sneak in one follow-up on that, have you guys seen any evidence of consumer trade down, whether it's into your category, or maybe even out of the category, just given the lower dollar price point per unit of consumption?
Todd Cunfer, Chief Financial Officer
No.
Joe Scalzo, President and Chief Executive Officer
No, I've not seen any evidence of that yet.
Operator, Operator
Okay, great. Thanks, guys. I'll catch you up. Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Steve Powers, Analyst
Hey, guys. Thanks. Can you hear me?
Todd Cunfer, Chief Financial Officer
Yes.
Joe Scalzo, President and Chief Executive Officer
Yes.
Steve Powers, Analyst
Okay, cool. I was having some phone issues earlier. So, thank you. I guess, two questions. The first one is just on reinvestment spending and sort of the philosophy as we go forward. I think you've been clear about your plans over the balance of '22. But as we move forward, just given what you're seeing in the environment, given your own innovation pipeline, is the thought process that that rate of reinvestment spending kind of parallels sales as we go forward, or do you feel like you have an opportunity to accelerate that spending to accelerate that top line and get ahead of it, or conversely as a point of margin leverage? Just how you're thinking about strategic investments beyond this current year?
Todd Cunfer, Chief Financial Officer
Sure. So, Steve, our long-term model is to maintain marketing investment with sales growth. Obviously, the last couple of years, we've exceeded that while maintaining gross margins. We have been able to maintain high marketing support in our business. The top line has exceeded our plan, and it has given us a lot of financial flexibility to increase investment in Quest, where we bought the business, it was about 6%, 6.5% of net sales. We've gotten it up to about 9%. So, we've exceeded marketing spend as sales growth this year, with a little bit of pressure on margins, and we pulled back a bit. As I mentioned, we're still going to grow at a mid to high single-digit rate. So, it's still pretty healthy growth. We spent a lot in the fourth quarter last year, so we were jumping off a high base. We're comfortable with the amount of spending that we have. If we can get some upside in the second-half and maintain margins, we will not hesitate to spend some incremental marketing in the fourth quarter if the P&L allows us. But going forward, growing with sales is the model we predict.
Joe Scalzo, President and Chief Executive Officer
And I would add to that, we're fairly quantitative about return. So, when we know we've got a good return on investment, we're leaning in, and where we know we don't have a good return, we're pulling back. You can expect us to be focused on remaining around 10% of net sales while ensuring a strong return. Since we’ve been public, we steadily increased marketing support because the return has been good.
Steve Powers, Analyst
Great, great. And then, a second question, different tact. We spoke a couple of months ago, it was clear you didn't feel any outright urgency for M&A, but you continued to look for the right asset at the right price. I guess just an update on your thinking there; specifically, what we were talking about kind of valuation expectations of sellers having been frothy over the past few quarters, there was some discussion about whether the current market backdrop was going to reset people's expectations. Just any sense if you're seeing a movement there?
Joe Scalzo, President and Chief Executive Officer
Early indications are we'll see if they play out; yes, expectations are starting to change. The conversations typically start with we're going to IPO the business, but if you give us 30 times earnings, we might sell it to you. Those kinds of conversations, given what's going on in the IPO market and equity values, are less frequent now, right? Seller expectations are coming down. Bankers believe they have to tell the owner exactly what he wants to hear or she wants to hear, and that's starting to come down. The environment as we move forward is getting a little bit more conducive to getting some deals done. There's a lot of assets, but there aren't many assets we like to value. You should expect us to continue being tough on value.
Steve Powers, Analyst
All right. Thanks for that, Joe. Thanks, Todd.
Operator, Operator
Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.
Pamela Kaufman, Analyst
Hi, good morning. Thanks for the question. Can you comment on the magnitude of the price increase that you're planning to take at the end of the fourth quarter? And will it be across the entire portfolio? Related to that, what are you seeing across the competitive landscape from a pricing standpoint? Are you observing other branded competitors raising prices at similar rates?
Todd Cunfer, Chief Financial Officer
Yes, so the price increase we just announced this week is very similar to the price increase that took effect in September. It varies by product form and brand a bit, but the last price increase was a weighted average of about 8%, and this one is similar. From a competitive standpoint, yes, we were probably ahead of the curve on pricing. We are now seeing our competitors take price. It differs; some are similar to our price increase, while others are a bit more modest. We feel very, very good about our pricing actions.
Joe Scalzo, President and Chief Executive Officer
Yes, Pamela, if you're a competitor buying dairy proteins, you better be taking pricing because the marketplaces are at historic highs and do not appear to be coming down anytime soon. If you're not taking cumulative double-digit or more pricing, you're not keeping pace with the costs coming into your products.
Pamela Kaufman, Analyst
Right. It seems like the first round of pricing went very smoothly from both a retailer and consumer standpoint. What has been the retailer reaction to the second round of pricing?
Joe Scalzo, President and Chief Executive Officer
It's too early to call, and I'm glad you think it was smooth. But retailers are trying to protect consumers, and you run the gauntlet with any price increase. They're dealing with this across the board throughout their stores; all the buyers are handling it. We’ll see if this is easier or the same as the first one. Retailers want justification for price increases based on cost changes. We feel pretty confident we have facts to make them feel comfortable the price increase is justified, but it won't be easy.
Pamela Kaufman, Analyst
Right. And one last question on different topics: Can you comment on the divergence that you pointed to in bar performance? It sounds like Atkins was impacted by lower mobility because of Omicron, but Quest bars benefited from more shopper trips. What do you see as the different dynamics across the two brands? Is it mainly a function of the channel mix, or are there other factors influencing that performance?
Joe Scalzo, President and Chief Executive Officer
Yes, I think channel mix and category benefit. Quest has a very large and small format convenience store business that collapsed during COVID; people just weren't going into the gas stations to buy bars. That business has come back and is robust. The consumer benefits are very different. Quest is about active protein for an active lifestyle, while Atkins is about weight management. So, I think the environment for weight management is not fully back to its potential. If you consider the second quarter, consumers were sheltering in place due to COVID. Now, with rising gas prices and economic uncertainty, people aren't feeling particularly positive about the future made it hard for people to think about lifestyle changes. We see some similarities here, where people tend to indulge in snacks like chocolate when they don't feel good. While it's uncertain, I think we will see interest in bars as people return to work.
Pamela Kaufman, Analyst
Right. That makes sense.
Joe Scalzo, President and Chief Executive Officer
Yes, thank you.
Operator, Operator
Thank you. Our final question this morning comes from the line of Ryan Bell with Consumer Edge Research. Please proceed with your question.
Ryan Bell, Analyst
I just wanted to ask a little bit about the expansion of your licensing partnerships across categories. Where do you see the size of that, and maybe the opportunity for future expansion?
Joe Scalzo, President and Chief Executive Officer
Ryan, I don't think we see it as a strategy today. We like the category we're in, snacking in our aisle, and we feel that deployment of resources against that is our highest leverage opportunity. We had entered the Quest team into the frozen pizza market and ran that business for a few years. We just came to the conclusion that it doesn't leverage our core strengths in supply chain, customer relationships, or innovation. It's better to put it in the hands of a partner who has successfully managed our meal bar business on Atkins. For us, it's more about focusing on the categories that we believe offer the greatest growth prospects.
Ryan Bell, Analyst
Thanks. And then, you were talking a little about some of the consumer behavior shifts, where people maybe aren't feeling quite as great, but you pair that against needing to focus on weight management more than ever. Have you thought about that more over the medium term in terms of the household penetration opportunity where you see snacking versus on-the-go demand, shifting toward e-commerce, and just the broader evolution of that?
Joe Scalzo, President and Chief Executive Officer
Yes, it's a bit of a dichotomy. Since summer 2019, we've seen double-digit growth in total buyers on Atkins, so high-end; overall takeaway for the brand is rising, and so is interest in low-carb lifestyles. The buyers are sticking around. Our challenge has been the buy rate. Making lifestyle changes is tough. When we think about weight management, people are motivated when they feel healthy but are hesitant to embrace lifestyle changes during uncertain times. So, we see long-term trends going in our direction despite short-term headwinds. The growth in buyers is very positive, and we just need to get people to snack more.
Ryan Bell, Analyst
Thanks. And the last question for me, in terms of the opportunity getting to the 40% gross margin range, were you saying in terms of the pricing that you were expecting to take and how that would trickle through into fiscal '23? Are you expecting to get closer to that or see some improvement on a year-to-year basis?
Todd Cunfer, Chief Financial Officer
Yes, I mean, obviously, 40% is the target; the question is when. It's really hard to predict early on what FY '23 is going to look like from a cost perspective. Prices continue to be dynamic, just exacerbated by the Ukraine-Russia conflict. It's very hard for us at this point to predict. So, we're not going to comment on what gross margins will look like next year, but that target of 40% remains a competitive advantage for us.
Ryan Bell, Analyst
Great, thank you.
Operator, Operator
Thank you. Ladies and gentlemen, our final question this morning comes from the line of Eric Larson with Seaport Research. Please proceed with your question.
Eric Larson, Analyst
Yes, thanks, everyone. Thanks for squeezing me in. I just have one question, Joe. And I'm sure that you've probably gone back and studied this, but you didn't own these brands, or run them in the last economic recession, which is now over a decade ago. So, if the U.S. goes into economic recession, how do the brands perform, and what would you do or not do differently than what you're doing today with a weak U.S. economy?
Joe Scalzo, President and Chief Executive Officer
Yes, we've been looking for proxies; I think the best proxies are small indulgences, like snacks. So, our view going into this is that people will continue to invest in themselves and in low-ticket items to make their lives better. Also, let's not forget that on both brands, our consumer is pretty upper-middle-class, so we believe they can withstand a recession better than other categories. However, we're watching it very carefully for sure.
Todd Cunfer, Chief Financial Officer
Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Scalzo for any final comments.
Joe Scalzo, President and Chief Executive Officer
Thank you again for your participation on today's call. We hope you continue to remain safe, and we look forward to updating you on our third quarter results in June. Have a good day.
Operator, Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.