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Amplify Snack Brands: Post Q1 Results And The Secondary, It Is Still A Short

Amplify Snack Brands posted Q1 results largely in line with my previous prediction from my first two articles, including a 4% margin decline.

As predicted, Amplify filed for a secondary offering which all but confirms there is almost zero chance of a takeover.

Amplify Brands' margins continue to decline and will likely only get worse with the acquisition of a Nutritional Bar company named "Boundless Nutrition".

I reiterate my price previous price target of $5.4/share or 60% downside.

Several new developments have occurred since my last article in which I highlighted my short thesis of Amplify Brands (NYSE:BETR) (Article 1 Here, Article 2 Here). Amplify reported Q1 earnings on Monday, May 2nd, in which it barely met revenue forecasts and EPS forecasts. It also announced a small acquisition of a nutritional bar company named "Boundless Nutrition." It then went on to file an S-1 for a secondary on that Thursday. Everything except the small acquisition happened basically as I predicted it would. All of the recent information confirms my original short thesis. I will break down the major pieces of news in this update as well as provide some additional insight into what I foresee for Q2 results.

Q1 Results and Gross Margins

Amplify issued Q1 earnings results on Monday, May 2nd. It reported revenues of $54.3m (22% y-o-y growth, down from 40% the previous quarter), gross margin of 52.3% (283 basis point decline y-o-y, and 418 basis point decline q-o-q), and EPS of $0.11. Pretty terrible Q1 results, especially on the backs of the three or four upgrades the company saw in Q1. The poor results from a revenue and gross margin standpoint are even more concerning because the company used heavy promotions in order to meet revenue forecasts. These heavy promotions volumes may have spillover effects into Q2 by reducing orders in the Grocery and Big Box chain channels because of left over inventory. I will explore this in detail below in the Q2 Outlook Section.

Management also made some very conflicting statements on the conference call around their gross margins for 2016. They could not seem to decide if they could meet their gross margins guidance of flat year-over-year gross margins (55-56%) or not. Below is an excerpt that highlights their confusion.

Based on the Q1 gross margins of 52.3%, it is virtually impossible mathematically for the company to have flat gross margins for 2016 compared to 2015. This is evidence that my initial assessment that gross margins will fall is beginning to materialize. To recap, I believe gross margins will fall below 50% by year's end, and will eventually go as low as the low as 40%.

Boundless Nutrition Acquisition

In the call, the company announced that it acquired Boundless Nutrition, a company that makes Oatmega Bars and Perfect Cookies. The announcement did not include the deal amounts, it left that for the 10-Q. Amplify paid $20.8m upfront for...