- Organic Net Sales Decline: Fell 7% YoY to $494.3 million in Q2 2026.
- Adjusted Gross Margin Drop: Declined 340 basis points to 19.5%, driven by divestiture-related costs.
- Snacks Divestiture Impact: Sale to Snackrupters for $115 million cash reduced pro forma leverage from 4.9x to ~4x.
- Adjusted EBITDA Decline: Fell to $24 million vs. $38 million YoY, reflecting snack business exit and stranded costs.
- Free Cash Flow Growth: Rose 22% to $30 million, with net debt reduced by $32 million to $637 million.
Divestiture of North American Snacks Business
The company announced the sale of its North American snacks business to Snackrupters for $115 million in cash, which will be used to reduce debt. The divestiture is expected to free up resources for investment in other areas and is anticipated to be gross margin and EBITDA accretive. The company's North America business will now focus on three flagship categories: tea, yogurt, and baby and kids.
Operational Improvements and Cost Management
The company expects to mitigate $20-25 million of stranded costs within 6-12 months. The Snacks business was not a significant cash-generating business, and the company is focused on inventory reductions and payables to improve cash delivery. The company has a disciplined approach to capital management and prioritizes debt reduction. Pro forma for the transaction, leverage would fall from 4.9 times at quarter end to approximately four times.
Valuation and Outlook
With a P/E Ratio of -0.17 and an EV/EBITDA of -1.84, the market is pricing in significant challenges for the company. However, the divestiture of the Snacks business and the focus on core categories are expected to drive growth and improve profitability. Analysts estimate next year's revenue growth at 1.0%. The company's Free Cash Flow Yield is 5.72%, indicating a potential upside. The ROE is -111.73%, but this is expected to improve as the company focuses on cost reduction and innovation.
Growth Drivers and Innovation
The company's yogurt business is doing well, with single-serve Greek yogurt driving about 100% incremental growth. In the Earth's Best business, seven new SKUs are being launched in the big kids snacks area, adding protein and fiber. The company expects sequential improvement in the fiscal second half, both on a reported and pro forma basis, driven by innovation in the international segment and cycling of challenges in North America.