Prepared remarks
Thank you for standing by, and welcome to BellRing Brands' Third Quarter Fiscal Year 2026 Earnings Conference Call. I would now like to hand the call over to Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead.
Good morning, and thank you for joining us today for BellRing Brands' Third Quarter Fiscal 2026 Earnings Call. With me today are Mike Axelrod, our President and CEO; and Paul Rode, our CFO. Mike and Paul will begin with prepared remarks, and afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC Filings sections at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued this morning and posted on our website. With that, I will turn the call over to Mike.
Thank you, Jennifer, and good morning, everyone. Thank you for joining our third quarter earnings call. I'm excited and honored to lead BellRing, and I'm grateful to the Board, the executive leadership team and colleagues across the company for the very warm welcome. As it's my seventh day at the company, I'll start the call with introductory remarks, and then pass it on to Paul to cover our third quarter performance and outlook for the remainder of fiscal 2026. I joined BellRing after 30 years in the consumer packaged goods industry across both entrepreneurial and large-scale businesses. Throughout my career, I've had the opportunity to grow businesses profitably by strengthening execution, improving operations and speed to market, and investing behind strong brands. What attracted me to BellRing was the combination of an attractive category with a long runway for growth, the market-leading Premier Protein brand, and a meaningful opportunity to improve execution. I built my career by putting the consumer first, building strong customer partnerships and creating value through disciplined execution, and I see many of these same opportunities here. Encouragingly, consumer demand for ready-to-drink protein shakes remains strong, and the category is among the fastest growing in CPG. We continue to believe there is substantial runway for growth supported by long-term health and wellness trends. While competition has increased, that is exactly what you would expect in an attractive, growing category. Premier remains the category leader, consumer trends improved every quarter this year, and we continue to see considerable opportunities to better realize the full potential of the business. These category and brand strengths give me confidence that our current financial performance, which has been affected by some transitory factors, does not reflect the long-term potential of the business. As the categories become more dynamic and competitive, winning requires greater operational discipline, faster decision-making and new capabilities. While we've done many things well, we have not executed consistently at the level we expect of ourselves, and we are not satisfied with our financial performance. As Paul will discuss, actions are already underway to put the business on a healthier footing, but I believe there's considerably more opportunity ahead. I believe in building winning teams that are highly accountable, customer-focused and data-driven. Over the coming months, I'll spend time listening to our employees, customers and partners, identifying opportunities to improve, and empowering our teams to make thoughtful decisions and drive accountability across the organization. There are certainly near-term challenges to work through, but I believe they are manageable, and I see meaningful opportunities to improve performance and better translate our category leadership into more consistent, profitable growth over time. In closing, I believe BellRing's top- and bottom-line growth opportunity remains compelling. My commitment is straightforward: move with urgency, execute with discipline and create long-term value for our shareholders. I look forward to speaking with you again on our fourth quarter earnings call to share more about my strategic priorities, operating plans to create long-term shareholder value and our 2027 guidance. I'll now turn it over to Paul to talk through the quarter and our updated outlook.
Thanks, Mike, and welcome to the BellRing team. Our third quarter net sales and consumption exceeded expectations with both Premier Protein and Dymatize contributing to the upside. However, adjusted EBITDA margins were below our guidance, reflecting inventory-related headwinds and higher freight costs. We expect these pressures to continue in the fourth quarter and have incorporated them into our revised guidance, which I will discuss shortly. We remain focused on our growth priorities, including innovation launching this quarter, and are encouraged by the resilience of Premier Protein's brand metrics despite a highly competitive environment. That said, we are not satisfied with our financial performance and are focused on restoring a stronger profit trajectory and delivering more consistent results as we look ahead to fiscal '27. To support that objective and the long-term growth of the business, we are taking decisive actions across pricing, channel mix, productivity and supply chain capabilities to bolster our operating model and address cost pressures. First, we have announced a double-digit price increase on Premier shakes and additional pricing on powders, both effective in our first quarter of fiscal 2027. We believe these actions are necessary to offset sustained inflationary pressure in key input costs and support a healthier margin profile over time. With this price increase, we expect volume-related elasticity to be slightly greater than 1. Second, we continue to take steps to diversify our business across channels, categories and adjacent product segments. In FDM and e-commerce channels, we expect meaningful distribution gains in '27, supported by strong retail demand for both core and innovation offerings. In convenience, we are advancing a disciplined expansion through targeted regional DSD expansion. We believe our core 30-gram protein shakes and our new Premier Protein Ultimate product, with 42 grams of protein, are well suited to the convenience channel and can drive incremental growth. We are also excited about the launch of Premier Protein Sparkling Soda, which expands us into the refreshment category and creates incremental distribution opportunities. Together, these initiatives are expected to broaden our consumer reach and further diversify our channel mix over time. In club, we currently expect our shake assortment next year to be generally consistent with this year, with one item representing a low single-digit sales percentage of this year's net sales expected to rotate out. We expect to retain a portion of that demand with our remaining flavors and continue to see opportunities to expand our club presence through innovation and new offerings that align with retailers' evolving assortment strategies. Third, we have completed several productivity initiatives, including this year's cost savings programs and our organizational realignment which we announced in late June. These actions are designed to simplify the business, reduce structural costs and improve execution discipline as we enter fiscal 2027, where we will continue to focus on cost savings. And finally, we are working to strengthen our planning capabilities and end-to-end supply chain processes to improve inventory management. These efforts are in the early stages and include investments across people, systems and processes to support more consistent supply chain performance going forward. We'll provide further updates on our 2027 initiatives on our fourth quarter earnings call. Overall, we expect to deliver improved margins over time, with progress beginning in fiscal 2027. I'll now turn to an update on the category, our 2026 operating plans, followed by our Q3 results and guidance. Starting with the category. As Mike mentioned, category fundamentals remain healthy with strong consumer demand for protein. We continue to expect fiscal year category growth in the high single digits, primarily driven by volume. Household penetration continues to grow for both the protein shake category and Premier shakes. Premier household penetration has reached almost 23%, with shake repeat rate consistently the highest in the category. In the third quarter, 70% of RTD shake category volumes were sold on price promotion. This is relatively in line with historical norms for this period after adjusting for the shift of a major e-commerce promotion, while down sequentially from the heavier promoted second quarter. While category fundamentals remain strong, our outlook assumes fourth quarter promotional levels will be more similar to the second quarter trends, reflecting continued value-seeking behavior and elevated promotional activity during the key Q2 and Q4 seasons. Over time, we continue to expect category-based price increases as a result of meaningful input cost inflation. Our demand drivers for fiscal '26 remain centered on: one, growing our distribution both in and out of aisle; two, increasing advertising investment while elevating its impact; and three, launching innovation that provides consumer excitement, advocacy and drives trial. We remain on track to grow TDP double digits in fiscal 2026. Store activation improvements with our new broker and internal retail sales teams continue to drive meaningful FDM growth. Recall, Q2 and Q4 reflect our typical seasonal increase in promotional activity. Our fourth quarter will include a promotional event with a major mass retailer featuring displays and end caps which is similar to our second quarter event. In addition, we are repeating our Q4 club promotions with similar timing to last year. Our Q2 promotions delivered significant household gains, including many new-to-category consumers, and we look for further gains in Q4. With respect to advertising, we increased our investment this year and launched Premier's Go Get 'Em campaign, which is driving solid lifts in brand equity, awareness and traffic to our website and e-commerce product pages. Campaign ROI is stronger than last year, and our full year outlook continues to reflect advertising investment at approximately 4% of sales. Turning to innovation. As we've discussed previously, our demand study identified performance and refreshing protein as two of the most attractive and underserved areas in the category. Our Premier Protein 42-gram Ultimate Shake and Premier Protein Sparkling Soda expand our product portfolio and performance with high protein and refreshment, while creating new opportunities to reach consumers across additional occasions. Both products are rolling out to mass, food and e-commerce channels this quarter and will be supported by targeted retail and social media campaigns to drive awareness. Moving on to third quarter results. Net sales increased 4% in the third quarter, with both brands ahead of our expectations. Premier Protein brand and RTD shake net sales increased 1%. Shake volume grew 3%, partially offset by a 2% decline in price/mix, with dollar consumption up 6%. Sales growth trailed consumption primarily due to e-commerce promotional timing, a greater promotional impact on net sales and retail consumption, and modestly lower trade inventory. Regarding e-commerce, total consumption growth benefited by approximately 1 percentage point from a promotional timing shift to June compared to July in 2025. Excluding that benefit, consumption outside club grew approximately 16%. Compared to our expectations, shake sales and consumption both benefited from the early start of a small portion of a promotion at a major mass retailer and stronger baseline velocities. Dymatize net sales were up 27%, with volumes up 6%, and strong price/mix of 21% reflecting the inflation-driven price increases we implemented earlier this year. Compared to our expectations, Dymatize saw higher consumer demand primarily in e-commerce and international channels and benefited from distribution gains in overseas markets. Adjusted gross profit was $158 million, with adjusted gross margin of 27.7% compared to 35.1% a year ago. The year-over-year decline was driven by significant protein and freight cost inflation, including tariffs. Additionally, we recorded a charge in Q3 on excess bottled shake inventory. This inventory-related charge, which was a 180 basis point headwind, was the primary variance from our forecast with the remainder from higher-than-expected freight costs, which were offset by the benefit from higher sales. SG&A expenses were $94 million or 16.4% of sales, including a $7 million advertising increase or approximately 100 basis point increase as a percentage of sales. SG&A expenses also included a $5 million charge related to our organizational realignment, which was treated as an adjustment to EBITDA. Once complete, we expect this to generate an annualized run rate operating expense savings of $10 million to $12 million. The fourth quarter will benefit from modest savings, with the majority expected in fiscal 2027. Turning to our 2026 outlook. We now expect full year net sales of $2.335 billion to $2.375 billion, which represents growth of 1% to 3%, versus our prior guidance of flat to 2% growth. Adjusted EBITDA is expected to be $275 million to $295 million with a margin of approximately 12%. Our full year adjusted EBITDA outlook includes $28 million of unfavorable inventory-related impacts, $21 million of which have already been recorded in Q2 and Q3. The remainder primarily relates to targeted trade spend anticipated in our fourth quarter to support excess bottle inventory sell-through, reflecting a prudent decision to optimize those levels ahead of year-end. We continue to expect tariffs to be an 80 basis point margin headwind for the year. The change in our outlook versus our prior adjusted EBITDA guidance is primarily attributable to two items: inventory-related actions and higher freight costs. Freight rates have risen sharply since our May earnings call and are expected to remain elevated, incrementally weighing on second half margins by approximately 140 basis points. Turning to the fourth quarter. We expect net sales to be flat at the midpoint, with Premier up low single digits inclusive of an approximate 100 basis point headwind from powders. Similar to Q2, we expect double-digit volume growth for RTD shakes to be mostly offset by unfavorable price/mix from strong promotional activity in club, mass and e-commerce. We expect Premier shake consumption to be up mid-single digits, modestly outpacing sales due to the larger impact of promotions on our net sales. Dymatize and all other are expected to be down mid-single digits as Dymatize faces a tough fourth quarter comparison. Fourth quarter adjusted EBITDA margin is expected to be approximately 10%, reflecting our seasonal promotional activity during Q4 as well as significant commodity and freight inflation ahead of pricing. Additionally, bottle inventory related actions are expected to be a headwind of approximately 100 basis points to the adjusted EBITDA margin rate in the quarter. Now I'll make a few comments on cash flow and liquidity. In the third quarter, we generated $79 million in operating cash flow, in line with our expectations, and ended the quarter at net leverage of 3.2x. Recall that we anticipate payment of a sizable legal settlement in our Q4. As a result, we expect to end the fiscal year at net leverage of approximately 4x. In closing, our conviction in the long-term potential of our category and the Premier brand remains strong. Fiscal 2026 has been an unusually dynamic year with meaningful inflationary pressures and evolving category dynamics. Yet, Premier remains the category leader and we continue to see healthy consumer demand and strong brand fundamentals. We are taking actions to improve profitability while continuing to invest in the long-term growth of the business through advertising, distribution expansion and innovation. We believe the strength of the brand provides a solid foundation for stronger long-term financial performance and value creation. We look forward to sharing more about our plans on our fourth quarter earnings call. Before we open the line for questions, I'd like to thank Darcy Davenport for her many contributions to BellRing. Darcy has led this organization for over 10 years and was instrumental in taking the company public in 2019. Under her leadership, revenue has grown tenfold, with Premier Protein now a $2 billion brand and a category leader. As much as she loves the company and brands, it's the people and company culture that she loves the most. It's been a privilege to work alongside Darcy for the past decade, and we all wish her the very, very best in the future. I will now turn it over to the operator for questions.
Questions and answers
Our first question comes from the line of Andrew Lazar of Barclays.
Welcome, Michael. I realize you've obviously only just officially started, but the company is obviously in the midst of trying to address a number of challenges, all while facing tremendous cost pressure at the same time. So this makes it a bit more difficult to assess, I think, where sort of a trough in performance and profitability might be. As we think ahead to fiscal '27 and beyond, once the company is past these near-term inventory and freight costs, I guess, does the business also require more in terms of ongoing marketing support given where we are in the category competitive dynamic? And how do you view the company's ability to take pricing to deal with elevated costs while at the same time discounting to move inventory? So basically, I'm trying to get a sense of whether you see fiscal '26 as a trough, and where you think margins could ultimately settle and sort of how long the journey is to get there.
Andrew, I'll start and then Mike can chime in as he likes. So we do not see '26, obviously, as our new normal for our margins. In fact, as we said in our prepared remarks, we expect our '27 EBITDA margins will improve. I just want to go through a couple of the puts and takes. First, we do have a number of inventory-related impacts that we called out on the call that we would not expect to recur. That's about a 120 basis point headwind to our '26 results that we would not expect to recur in '27. We also have a number of initiatives that we are taking to improve financial performance, pricing, productivity and execution. We are taking pricing on our shake business, a double-digit price increase that goes into effect in the first quarter. We're also taking a third round of pricing on our Dymatize powder business that also goes into effect in the first quarter. We have been chasing pricing on powders throughout the year, and we've seen a lot more inflation in '26 than we anticipated on our shake business, so this price increase is addressing those factors. We also announced the cost savings initiative and the reorganization, which will be a $10 million to $12 million benefit, with some offset related to bonuses. But it really comes back to pricing and some of the initiatives we're taking to improve our margins as we move into '27. So we do think that '27 margins will improve from where we are in '26.
Yes, Andrew, I'm not, given my seven days, ready to put a stake in the ground where it ultimately settles. But my focus over the next several months is really to understand the structural earnings power of the business, the execution issues, and really build a path to sustainable profitable growth. And as we gain confidence there, we'll communicate that transparently to you.
Our next question comes from the line of Tom Palmer of JPMorgan.
I wanted to maybe clarify some of the pricing plans as we think about moving into fiscal '27 when it comes to shakes. To what extent does this fully offset input cost inflation? How have kind of discussions with retail partners gone? And do you expect others in the industry to take similar actions?
So I'll start with the last. We saw earlier this year that another major player in the RTD space took a double-digit price increase, and our increase is in line with theirs. We do expect there will be more — we've heard rumors — and we know we need to act. As for covering our inflation, the last time we raised prices on shakes was nearly two years ago, so we've absorbed inflation over the last couple of years. We expect this increase will help us return to healthier margins and continue to invest in the business. And then there was a third. What was the third point? Yes. It's about communication with retailers and visibility. I'm trying to understand the elasticity piece and how much of that factors in any distribution effects. Yes. As with any price increase, retailers generally don't like it, but we're having good conversations and are near finalizing the increase. We are assuming elasticities greater than one from this price increase as we plan for next year. We also expect strong distribution gains, especially in FDM and e-commerce. We have a lot of innovation launching this fourth quarter, which will provide a full-year benefit next year as well.
Our next question comes from the line of Alexia Howard of Bernstein.
Welcome, Michael. You mentioned in the press release that strengthening execution was listed as the first meaningful opportunity on your agenda as you come into the company. Can you talk about where you see the biggest opportunities for improved execution and how long it will take to achieve those?
Were you referencing the quote from the earnings release, is that what you're referencing?
That's right, yes. I think you mentioned it in the opening remarks as well: the strength of the opportunity to improve execution.
Yes. I mean, I think it's on several fronts. So part of this, I think there's opportunities for us to improve execution around just as we've seen some inventory write-offs in this year. And so I think continuing to ensure that we're executing our supply plan, demand planning processes, there's opportunities for, I think, some system improvements, process improvements. And so those are some of the primary things that we're referencing. Obviously, Mike has just started, so he will have his own viewpoints, I think, on operations and potential opportunities as we move forward. Yes.
I view it in the context of really supply chain excellence. And so really working with our supply chain partners to really drive to the lowest-cost production and distribution, really optimizing that. I think there's a lot we can do on the procurement side and strengthening our procurement and really working with our co-manufacturers to drive to the lowest cost possible. And also to be integrated within our supply chain, so we get in front of any inventory issues much sooner and are able to anticipate that and drive actions before it actually impacts us.
One thing I would add is we completed a reorganization in late June to reduce layers, which should speed up decision-making and bring people closer to decisions. Those changes were also intended to enhance our ability to be more nimble and flexible as we move forward.
Our next question comes from the line of Steve Powers of Deutsche Bank.
Welcome, Mike. I guess my question is on the targeted regional DSD expansion that you spoke to. I guess maybe just a little bit more detail on what the plans are, how much has already been ironed out in terms of distribution partners, et cetera. And really, I guess, what does success look like for you in that initiative over the next 12 to 24 months? How material could it be as a percentage of sales, incrementality, that kind of thing? Just how you're thinking about that initiative. Because it's been something we've been talking about for a long time, but just interesting that now is the time to kind of press go on it. So just how you're thinking about it would be great.
You're correct. We have been talking about DSD, and we have been focused on it and active on it. Let me give some background and then dig into your question. First, convenience represents a meaningful white space. It's a big opportunity for our business. We have very little sales in convenience today. Overall, the convenience channel for RTDs is about 10% of the category, so that's a part of the category that we are starting to play in today. With the launch of our 42-gram Ultimate, that gives us another product in addition to our 30-gram so that we can push through the convenience channel. As our portfolio has evolved, it's giving us greater flexibility to pursue the channel. We've been working through a parallel path for a bit, looking at potential regional and national partners, and we remain focused on the opportunity. We're building internal capabilities and have been hiring some folks with DSD expertise, so we're building our muscle and have made progress. As we move into 2027, we see an opportunity to form partnerships with regional players in some key markets at the start of the journey to launch into those channels, learn quickly, and apply learnings to future expansion. The thinking is that there are several phases of the rollout that would start sometime this year, so we would expect to see some sales start flowing in our fiscal 2027 and then grow from there. This does not preclude us from continuing to pursue a national opportunity, but we feel this is a good place to start and it's something we've been working on very hard. We can provide further updates as we get into our November guide on where we are in that journey. We're still working through the details with our partners to set the course forward.
Our next question comes from the line of Jim Salera of Stephens.
Paul, I wanted to ask on the dynamics around volumes sold on promo. You guys called out that 3Q is kind of more seasonally normal and a step-down from a heavier promo in 2Q. I wonder if you can give us some details around it. Is that due to presumably other people in the industry also experiencing the same freight headwinds and commodity cost increase, and so that's just kind of a de facto way to help take a little bit of price back relative to the promo level before, and we would expect to see promo step back up? Or do we think that maybe in 2Q, that was just a little irrational and we should expect, I'll say, a more normalized promotional cadence from the industry going forward?
Yes, it's a great question, and one we probably don't fully know the answer to. To your point, we saw a more rational, lower promotional quarter, which is typical for the third quarter. What's hard to read is that in the second quarter we saw heavier spending from insurgent brands. It was across the category, but insurgent brands were spending much more in the second quarter and then pulled back significantly in the third quarter. It's unclear whether they were simply following the category pattern, where the big push periods are the second quarter and the fourth quarter around New Year and back-to-school, or whether inflationary pressures are making them pull back on demos and promotions. Time will tell. Either of those are possible, or it could be both. In any case, what we saw in the third quarter was that the percent of spend on promotion was certainly lower and back to more normal levels.
Our next question comes from the line of Kaumil Gajrawala of Jefferies.
Welcome, Michael. Looking forward to working with you. I guess as you were thinking about this job, as you were presenting to the Board to get this job, you're sort of looking at an industry that's no longer new, has no longer been discovered, certainly has tons of runway, but lots of folks are facing it. When you think about market cap creation as it relates to this industry going forward, what were some of the areas where you felt like BellRing has the right to win or maybe some of the specific things you feel like you can do or do differently to maybe get the shares or the equity value closer to where it was not that long ago?
Yes. So a little bit about my thought process in why joining BellRing. So Premier Protein is the #1 RTD protein brand and one of the most attractive and fastest-growing categories in CPG. There aren't many growing categories like this one. And I think that when you look and take a step back at the brand, it has exceptional consumer fundamentals. Household penetration also continues to go up. And it's only at 23%, so there's a lot of runway there. And most encouraging is it's got one of the highest repeat rates in the category. And so once you try a drink, you love it and you repeat it, which is very attractive. So for me, it was about the combination of a category that has that long, to your point, the long runway for growth and a brand that has already earned tremendous consumer loyalty. And I don't think BellRing is trying to create the demand. The demand is there. I think the opportunity is continuing to win through what I would call consumer-focused innovation, outstanding execution, in fact, world-class execution, and disciplined investment. So making sure we're investing in the highest-ROI opportunities. And across my career, I found that businesses with strong consumer fundamentals typically have many opportunities to drive profitable growth. And I see the same thing here at Premier and BellRing.
Our next question comes from the line of Matt Smith with Stifel.
Paul, I wanted to ask around the input cost outlook. Proteins remain elevated, but our projection suggests that they're stable but at higher levels. Are you able to take on a normal level of coverage into fiscal '27? And then on the freight side, have you started to see rates move lower, or are they just kind of sustained at higher levels? Kind of how do you see freight playing out in the fourth quarter and as you look ahead?
Yes. On freight, we saw freight rates really step up on us in the third quarter, and our expectation is that they remain at that high level in Q4. It's a combination of higher fuel costs and a supply-demand dynamic for drivers that worsened in the third and fourth quarters. Some of that will be sustained, while part is transitory and part could persist for a while. As we think about Q4 and our guidance versus last time, freight is a big headwind to our prior guidance. I would expect freight to carry a bit into next year. After that, geopolitical and other macroeconomic factors, including supply-demand for drivers, will determine how freight plays out. On protein costs, I'll break them into two pieces. For whey protein, which is our powder input, we expect prices to remain elevated throughout next year, though they might begin to ease in the second half. Supply-demand for whey is still very tight, so we expect those trends to largely continue. For milk proteins, specifically the nonfat dry milk component of the CME, prices were very high earlier this year. They have settled down somewhat since then but remain above what we saw in fiscal 2026. We expect inflation from milk proteins affecting our shake business going into fiscal 2027, representing incremental inflation beyond fiscal 2026. Right now we estimate that inflation is in the mid-single-digit range, though that could change. We typically hedge about six months out, so we do have some coverage on proteins for fiscal 2027. When we provide guidance in November, we will give further clarity on protein costs and our coverage.
Our next question comes from the line of Yasmine Deswandhy of Bank of America.
Welcome. Mike. I just wanted to ask a question about the incremental price increases just across the category. So you announced double-digit price increase on Premier. And then I think there's a peer of yours that announced a high single-digit price increase effective around the same time. Are you expecting an uptick from the 70% RTD shake category volumes sold on price promotion following these price increases? And I guess just historically, when you've taken price at this level, does it normalize back down to the 70% average over time or does it stay sticky at that elevated level?
It stays pretty sticky at the elevated level. Certainly, you would look at it as giving you optionality to invest back either through promotion or advertising. I mentioned earlier that from a pricing perspective the other largest brand in our category took pricing earlier this year and we’re announcing pricing now. As you mentioned, there are some others that are pricing, so I do think it's possible that others could take further pricing. As we look forward, time will tell if it increases promotional activity within the category. We’ve seen pretty healthy levels of promotional spend, especially during peak periods. Will it elevate from there? I don’t know, but it may provide some optionality. I do think there's true inflation that these increases need to offset.
Our next question comes from the line of Robert Dickerson of BTIG.
Welcome, Michael. I have a fairly simple question, and maybe I just don't know; I haven't gotten it yet. The category is clearly doing great. Your positioning still seems strong, and consumption trends, as you showed, look healthy. Could you simply explain why the excess inventory is already in place? It seems like if consumption is coming through and you're making the right amount of product, you wouldn't have as much excess inventory or be taking write-downs. I know it's a basic question, but please provide some color.
Yes. The inventory-related actions are specific to our bottles business, not tetras. There were several factors. We introduced tetras in the e-commerce channel and expected some cannibalization of our bottles, but the impact was larger than we anticipated. Part of that was driven by value-conscious consumers choosing the cheaper tetras. Our demand team did not cut demand quickly enough, and our supply team did not reduce supply fast enough. We tried to manage it, but in the third quarter it became clear that some inventory would not sell through in the timeframe we had planned, so we took a $10 million reserve in the third quarter. That represents about 2% of total inventory, but it is still $10 million. Our fourth quarter is also affected because we are promoting bottles more heavily to accelerate sell-through. So it is primarily a bottles issue, we believe it should be behind us, but it is a headwind compared with our prior guidance.
Our next question comes from the line of David Palmer of Evercore ISI.
I'm just wondering if you could maybe give a sense of where you see the evolution of this space in ready-to-drink protein. We've seen some SKUs come and go at Costco and others. And we've seen new forms: canned product, higher protein, PET, milk-derived. Some people will say that some of those players have a great tasting product that might have made them a tough competitor. So maybe you could step back and just give a sense of where you see the competition today, how you're responding, where you might see disadvantages or advantages right now. Because I think people will wonder how you're thinking that your market share will shift going forward.
Yes. I think if you just step back and look at the category, the dynamics are pretty similar at the moment to how they have been. There are two big players that together hold about 50% of market share and they continue to lead. There are a couple of insurgent brands that appear to be sticking; they've gained market share and are still lapping year‑over‑year gains, but over the last few months and quarters they have moved from sharp growth to more consistent market share. Meanwhile, legacy brands continue to decline. So at a 50,000‑foot level, the dynamics aren't dramatically different. There is still a lot of churn. Trust me, you have, even within the club, brands coming in with different products or flavors, so there is consistent churn as brands try to make headway. But as you pull back and look, the category dynamics are largely the same. We've talked in the past about ultrafiltered milk versus MPC, and I don't think those dynamics have changed much. Some brands using ultrafiltered milk have done well, both insurgents and big players, and some big players are strong with MPC or milk proteins, and that is true for insurgent brands as well. Going forward you'll see innovation—we had some significant innovation in the fourth quarter and I think it will continue to evolve. Again, at the 50,000‑foot level it's evolving and dynamic, but the dynamics haven't changed dramatically this quarter.
Yes. Just to build a little bit on Paul's remarks, I agree. I also think that given the increase in competition, innovation is critical, and the right innovation steers the consumer to Premier. Execution and operational excellence are also important, and those are capabilities and muscles we're building. As the category evolves and household penetration continues to rise, repeat rates are exceptional and consumers are loving protein. For me, it's making sure we have the right innovation, outstanding execution, and that we operate with operational excellence with our partners both internally and externally.
Our next question comes from the line of Jon Andersen of William Blair.
Welcome, Michael. Just a quick one on innovation. You mentioned the importance of innovation and you have a couple of new products launching, I guess, this quarter in Ultimate and Sparkling Soda. What are the kind of the milestones that you'll be watching or the metrics that you'll be watching carefully on these two introductions? And how should we be kind of measuring success, in your mind? And then more broadly, is there any kind of bigger innovation areas, formulas, form factors that you might be exploring down the road?
Yes. You're correct — we're very excited about the innovation we’re launching in the fourth quarter with the Sparkling Protein Soda and the 42-gram Ultimate. The first thing we’ll be watching is distribution. We gained nice distribution in the fourth quarter and expect to gain additional distribution in fiscal '27. We’ll also be watching repeat rates and monitoring media interactions, both on social media and at planned events, to see how consumers respond. Consumption is another key metric, and we’ll be watching it very carefully. These products are intended for different occasions and consumers: the Soda is for a different occasion, and the Ultimate targets athletes and a different consumer than the 30-gram product. Those are the major innovations, and we expect them to drive significant growth in fiscal '27. The team is working hard on additional innovation, but there’s nothing significant we plan to announce today. We will continue to do things like flavor extensions, and we’ll be in a better position to discuss further innovation as we get to November.
Our next question comes from the line of Robert Moskow of TD Cowen.
A couple of questions. In your prepared remarks, you talked about, in club, how one of your products will be rotating out and you're hoping to retain a portion of that demand. Is that a pallet that's coming out? And also you talk about retailers evolving assortment strategies. Can you give us more specifics as to how club retailers are evolving their assortment strategies? I think you've talked pretty specifically about what's changing in the past. And I want to know, are they expanding to more and more brands? Or are they doing something different now?
So to answer the first part of your question, yes, while we expect our club shake assortment to be very similar, we do expect one pallet to rotate out. It's one in-store pallet, our lowest-performing flavor at one retailer, and we expect that to happen in the fiscal first quarter. Regarding the second question, club retailers are constantly refining their assortments. They tend to keep a base of the highest performers and continuously churn through other products and offerings, which could be similar to what's already out there or something completely different. That is not a new change in space; we aren't seeing the club category shift from recent trends, although it is up from a year ago. Clubs consistently look for what drives incrementality in their business and how to maximize the productivity of each pallet position, so I would not say it has changed all that much. As for the pallet we are rotating out, we will continue to work closely with that club retailer to find additional distribution opportunities, whether through innovation, regional rotations, or flavor rotations. In the past, pallet positions have been added and subtracted, and typically other opportunities arise down the road to address that. That's what we were calling out in our prepared remarks.
Okay. And Paul, a follow-up question on the elasticity assumption. It's a little unclear to me what you're forecasting for elasticity. The math works out to be over negative 1.0. And I want to know if I'm overstating that with regard to the price increase you're taking.
So we said that we would expect elasticity to be greater than 1, fairly consistent with some of our past price increases. And obviously, we'll have a little bit of information when we get to our November guide as we may see some of that hit the shelf, so we could have some early reads. But those are our preliminary estimates at the moment.
Thank you. That's all the time we have for questions today. This concludes today's conference call. Thank you for participating. You may now disconnect.