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Pinnacle Foods Rides on Buyouts, Productivity Initiatives

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Pinnacle Foods Inc. is successfully expanding its retail market share, courtesy of its well-chalked acquisitions and business expansion endeavors. Also, the company is gaining from its operational efficiency initiatives which have been boosting savings. While these aspects have been benefiting the in-market performance of this renowned manufacturer and distributor of branded food products, underlying weaknesses in the Specialty segment and escalated costs stemming from logistics and packaging have been causing some worries lately. Let’s get a deeper insight regarding these aspects, impacting the company’s performance.

Expansion Efforts Boost Retail Market Performance

Pinnacle Foods in-market performance has continued to be impressive for a while, fueling its overall business performance. In fact, with fourth-quarter 2017 results, the company marked 15th straight quarter and sixth consecutive year of market share growth. Notably, during 2017, the company’s market share grew 0.5% while its composite retail consumption jumped 2.4% from 2016.

Acquisitions have been one of the prime catalysts behind the company’s sturdy market share growth. In fact, during 2017, the company gained synergies of $16 million from the Boulder Brands acquisition. Further, management expects to benefit from the residual synergies associated with this acquisition in the forthcoming periods. Other than this, Pinnacle Foods’ acquisitions of Duncan Hines manufacturing business and Garden Protein have also yielded favorably. Incidentally, the Duncan Hines business gave quite a boost to Pinnacle Foods market share during the fourth quarter.

In addition to strategic buyouts, Pinnacle Foods innovation efforts also added a number of iconic brands to its rich products line-up. Some noteworthy innovations in the past include new varieties of the Duncan Hines Decadent, Duncan Hines Perfect Size baking kits, Birds Eye product lines and Vlasic purely pickles. In fact, the company’s Birds Eye product lines have been gaining traction lately, impacting the company’s fourth-quarter performance positively.

For 2018, Management plans to roll out new products under the Birds Eye brand and will also be expanding its Hungry-Man Handful line. Moreover, encouraged by the popularity of Perfect Size for 1, the company will launch a variety of products and strengthen the Duncan Hines product line. Management is also planning exciting innovations for its gardein and Evol brands.

Productivity Initiatives Bode Well

The company has an operational excellence program in place, designed to generate annual productivity savings across the supply chain. On account of such efforts, combined with acquisition synergies and benefits from the network optimization program, the company expects productivity for 2018 to be 4-4.5% of costs of products sold. Pinnacle Foods is also pursuing other initiatives to boost gross margin, including improving its product mix through product innovation and low-margin SKU rationalization, increasing the effectiveness of trade promotional spending and realizing synergies from acquisitions. Based on these efforts, the company expects results to be stronger and anticipates gross margin improvement of 300-400 bps by 2020.

 



 

Final Thoughts

We note that Pinnacle Foods has been struggling with underlying weaknesses in the Specialty segment and also escalating logistics and packaging expenses. In fact, lately, such headwinds have been denting the company’s share price performance, which has witnessed decline of 5.6% in the past three months, faring slightly better than the industry’s 7.9% fall.

Nevertheless, Pinnacle Foods’ sustained efforts to boost market share and enhance efficiency are quite praiseworthy. We expect that such efforts will aid this Zacks Rank #2 (Buy) company to add new leaves to its growth story and also uplift investor’s confidence in the stock.

Hungry for More Consumer Staples Stocks? Check These

Investors interested in the same sector may consider United Natural Foods (UNFI - Free Report) , Estee Lauder Companies (EL - Free Report) and Tyson Foods, Inc. (TSN - Free Report) . While United Natural Foods sports a Zacks Rank #1 (Strong Buy), Estee Lauder and Tyson Foods carry a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

United Natural has come up with an average positive earnings surprise of 10.7% in the trailing four quarters. It has long-term earnings growth rate of 8.2%.

Estee Lauder has pulled off an average positive earnings surprise of 18.1% in the trailing four quarters. It has long-term earnings growth rate of 13%.

Tyson Foods has delivered an average positive earnings surprise of 4.7% in the trailing four quarters. It has long-term earnings growth rate of 11%.

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