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Conagra (CAG) Misses on Q4 Earnings & Sales, Stock Down

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Conagra Brands, Inc. (CAG - Free Report) released fourth-quarter fiscal 2019 results, with earnings and sales missing the Zacks Consensus Estimate. Results were hurt by business divestitures as well as high input costs and other expenses. These downsides were more than enough to dampen investors’ sentiments on the stock. Shares of the company fell nearly 6% in the pre-market trading session on Jun 27.

However, the top line improved year on year on the back of gains from the inclusion of Pinnacle Foods. Let’s take a closer look at the quarterly outcome.

Earnings & Sales

Conagra’s quarterly adjusted earnings fell 28% year over year to 36 cents. The figure missed the Zacks Consensus Estimate of 42 cents. The year-over-year decline was caused by higher outstanding share count as well as reduced operating profit in Legacy Conagra, loss of profits from divestitures, higher interest expenses and low earnings in the Ardent Mills joint venture. These downsides were somewhat mitigated by operating profit gains from Pinnacle Foods and decline in adjusted effective tax rate.  

Conagra generated net sales of $2,613.2 million, which advanced 32.9% year over year but missed the Zacks Consensus Estimate of $2,652 million. Sales were driven by contributions from Pinnacle Foods buyouts. However, divestitures of Trenton production facility, Canadian Del Monte business and Wesson oil business weighed on sales growth. Additionally, foreign currency hurt sales by 0.3%.

Organic sales (excluding Trenton) declined 0.7%, mainly due to elasticity-driven volume contraction that had offset improved price/mix.

Conagra Brands Inc. Price, Consensus and EPS Surprise

Gross Margin

Adjusted gross profit increased 23.7% to $709 million, backed by Pinnacle Foods’ inclusion. In Legacy Conagra, gross profit declined due to input cost inflation, reduced profits stemming from divestiture of Wesson oil business and lower organic sales.

Adjusted gross margin contracted to 27.1%, down almost 210 basis points (bps). The buyout of Pinnacle Foods was dilutive to gross margin by almost 110 bps.

Segmental Details

Grocery & Snacks: Quarterly sales in the segment came in at $746 million, which declined 7.1% year over year due to the divestiture of the Wesson oil business. Organic sales fell 2.5% with volumes down 1.1%. Performance in the segment was adversely impacted by changes in merchandising, declines associated with elasticity and other production challenges.

Refrigerated & Frozen: Net sales declined 0.6% to $687 million. The category was affected by lower merchandising support for Marie Callender's, product recall, brand investments and persistent decline in refrigerated business. Further, volumes in the unit fell 1.5%.

International: Net sales dropped 7.4% to $193 million due to the divestiture of Canadian Del Monte and Wesson oil businesses as well as adverse currency movements. On an organic basis, net sales improved 5.6%. Volumes in the category increased 5.2% volume decline.

Foodservice: Quarterly sales in the segment fell 12.6% year over year to $231 million, primarily due to the sale of Wesson oil business and Trenton facility. Organic sales (excluding Trenton) declined 0.6% in the reported quarter and volumes fell 5.9%.

Pinnacle: Sales in this segment amounted to $757 million. Consumption trends in the unit continued to decline due to the implementation of value-over-volume strategy. However, improvements were witnessed in in-market base velocities.

Other Financial Fundamentals

Conagra exited the quarter with cash and cash equivalents of $236.6 million, senior long-term debt (excluding current portion) of $10,459.8 million and total stockholders’ equity of $7,463.7 million. In fiscal 2019, the company generated net cash of $1,125.5 million from operating activities.

During the quarter, Conagra paid quarterly dividend per share of 21.25 cents. The company paid dividends worth $356.2 million in the fiscal.

Business Development

The company concluded the sale of Wesson oil business on Feb 25, 2019. At the end of fiscal 2019, the company completed the sale of Gelit, which generated net sales of $57 million during the fiscal. The same was included in the Refrigerated & Frozen segment. Post the fourth quarter, net proceeds from the sale was used to pay off debt.


 
Guidance

Conagra issued view for fiscal 2020, wherein organic sales are expected to increase roughly 1-1.5%. On a reported basis, net sales are expected to rise in the band of 13.5-14%. Further, management projects adjusted operating margin in the range of 16.2-16.8%.

The company continues to expect adjusted effective tax rate in the range of 24-25%. Adjusted earnings for the fiscal year is anticipated to be $2.08-$2.18 per share, after considering the loss of profit of nearly 2 cents stemming from the sale of Gelit.  

Additionally, the company updated the long-term view for fiscal 2022. Organic sales for the fiscal is expected to grow (at 3-year CAGR) nearly 1-2%. Adjusted operating margin is expected to rise in the band of 18-19%. Further, adjusted earnings are expected in the range of $2.68-$2.78, after considering Gelit’s divestiture.

Conagra currently carries a Zacks Rank #3 (Hold). Shares of the company have gained 6.7% in the past three months compared with the industry’s rise of 0.9%.

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