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Conagra (CAG) Poised on Pandemic-Led Demand, Hurt by Costs

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A number of companies in the food industry have been seeing strength in their retail businesses, courtesy of higher demand from elevated at-home consumption amid the pandemic. One such company that is benefiting from this trend is Conagra Brands, Inc. (CAG - Free Report) . Markedly, the company’s efforts to boost frozen and snacks categories are yielding well. Additionally, buyouts and innovations are providing an upside. That said, softness in Foodservice segment coupled with elevated costs is a roadblock for Conagra.

Let’s take a closer look.

Pandemic-Led Demand Aids Growth

Burgeoning demand amid the pandemic bolstered Conagra’s third-quarter fiscal 2021 results, with the top and the bottom line increasing year over year as well as beating the Zacks Consensus Estimate. Further, organic sales increased 9.7% on higher volumes and favorable price/mix. Volumes were aided by elevated at-home consumption amid the coronavirus pandemic, which in turn boosted Conagra’s retail business. Notably, the company’s retail sales increased 13.8%, with solid growth in frozen, staples and snacks category in the quarter.


 

We note that Conagra is focused on boosting the Frozen and Snacks businesses. In the fiscal third quarter, total Conagra Frozen retail sales increased 12%. We note that the company’s Frozen category has picked up more pace in the current situation, wherein the pandemic caused people to work from home and eat at home.

Further, the company’s Grocery & Snacks business sales gained 10.8% in the fiscal third quarter on the back of pandemic-led demand. Well, management expects at-home eating trends to stay high for a while and is well positioned to tap opportunities related to it. Conagra is on track with a range of innovation and brand-building efforts for exploring growth prospects in its frozen and snacks businesses.

Other Factors Working in Conagra’s Favor

Conagra acquired Pinnacle Foods in October 2018. The combination of the two companies is appropriate, given the increasing demand for frozen foods and snacks. The consolidation of these food companies has helped to create a robust portfolio of leading, iconic and on-trend brands. Further, the move is aiding to ramp up innovation and exploit the long-term benefits in the frozen foods space. During its third-quarter earnings call, management noted that it generated total synergies of $270 million from Pinnacle Foods’ buyout, year to date. The company said that it expects synergies worth $305 million (excluding pandemic-led costs) by the end of fiscal 2022.

Moreover, Conagra has been strongly committed toward undertaking innovation, which is clearly working well for the company. Even amid the pandemic, the company has been focused on carrying out innovation for its customers as well as consumers. In fact, the company witnessed favorable consumer and customer response for its new products during the quarter. Management, in its last earnings call, highlighted that its innovation performance exceeded the 15% target in the past the past two fiscal years and the last 52 weeks. Moreover, the company is beginning to see solid customer acceptance for its fiscal 2022 innovation.

Hurdles on the Way

While coronavirus-led increased at-home trends have boosted Conagra’s retail business, the same is dealing a blow to the Foodservice segment. Incidentally, quarterly sales in the segment declined 17.2% due to Sold Businesses impact and lower organic sales. Organic sales fell 16.5%, with volumes down 19.5% on an organic basis in the segment. The downtick was caused by reduced restaurant traffic amid the pandemic.

Apart from this, costs associated with COVID-19, input cost inflation as well as increased transportation costs put pressure on the company’s performance in the fiscal third quarter. Notably, inflation increased 3.9% thanks to the broad-based impact on the cost of materials, manufacturing as well as transportation and logistics. In fact, management anticipated the rate of inflation to keep rising in the coming few quarters.

That said, the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. Shares of Conagra have gained 11.3% in the past three months compared with the industry’s growth of 8.7%.

Better-Ranked Food Bets

Sanderson Farms, Inc. (SAFM - Free Report) , currently sporting a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 43.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pilgrim’s Pride Corporation (PPC - Free Report) , currently carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 24.2%.

The J. M. Smucker Company (SJM - Free Report) , currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 1.7%.

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