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Pinnacle Foods (PF) Gains on Buyouts, Weak Segments a Woe

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Pinnacle Foods, Inc. (PF - Free Report) has been gaining from its acquisitions and productivity enhancing initiatives to drive margins. However, the company’s growth remains challenged due to sluggish Specialty Segment and Pickle business.

Let’s now delve deeper into some of the factors that have been impacting the company’s performance.

Acquisitions & Innovation Aiding Performance

Acquisitions have been a prime growth driver for Pinnacle Foods in the past few years. Through the acquisition of Boulder Brand (completed in 2016), the company achieved synergies of $15 million in 2016 and is expected to achieve synergies of $15 million in 2017. This will benefit both gross margin and SG&A overhead. Also, some of the earlier notable acquisitions of Pinnacle Foods include Duncan Hines, Garden Protein and Wish-Bone salad dressings business.

Pinnacle Foods has also been innovating products to offer variety and maintain market share. Some popular innovations in the past include new varieties of the Duncan Hines Decadent, Duncan Hines Perfect Size baking kits and Birds Eye product lines. In fact, during the second quarter, the company launched Perfect Size for One, a unique baking solution kit and Vlasic purely pickles. It also launched five new platforms in the second quarter of 2017 to ensure continued momentum of the Birds Eye franchise.

Initiatives Inducing Productivity & Savings

The company has an operational excellence program in place designed to generate annual productivity savings across the supply chain. In fiscal 2016, the company’s operational excellence initiative drove productivity savings of 4.0%, as compared with 4.4% in fiscal 2015. Such savings related initiatives have also been aiding the company to offset input cost inflation, thereby improving gross margin. Pinnacle Foods is also pursuing other initiatives such as expanding its product mix through innovation and low-margin SKU rationalization.

The company’s growth initiatives have positively impacted its share price performance. Shares of Pinnacle Foods have increased 16.1% in the last 12 months against the industry’s decline of 13.8%.

Sluggish Segment & Other Headwinds Impacting Performance

Pinnacle Foods’ Specialty segment has been witnessing weakness since four consecutive quarters now. In the second quarter of 2017, sales in the segment declined 15.1% due to reduced volume/mix and the exit of low-margin businesses such as Aunt Jemima. Further, management expects the Specialty segment to remain challenged in the upcoming quarters due to sales loss from divestitures. The company has witnessed sluggishness in Pickle business due to continued competitive environment in the form of pricing and innovation. Although the company has been undertaking innovations to improve the performance of the Pickles business, the turnaround is expected to take some time.

Additionally, regular innovations have led to increased product introductory costs. Enhanced investment in consumer marketing and input cost inflation also adds to expenses. Moreover, Pinnacle Foods has been dealing with macroeconomic headwinds including stiff competition and a general shift in consumer preferences toward healthier food items.

Bottom Line

Despite such headwinds impacting the company’s performance, we remain hopeful that its consistent productivity initiatives and business expansion strategies through innovation and acquisitions will yield significant results and continue aiding growth.

Pinnacle Foods currently carries a Zacks Rank #3 (Hold).

Looking for More? Check these 3 Consumer Staples Stocks

Investors may also consider better-ranked stocks such as Constellation Brands, Inc. (STZ - Free Report) , Nu Skin Enterprises, Inc. (NUS - Free Report) and Estee Lauder Companies, Inc. (EL - Free Report) all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Constellation Brands delivered an average positive earnings surprise of 11.7% in the trailing four quarters. It has a long-term earnings growth rate of 18.2%.

Nu Skin delivered an average positive earnings surprise of 10.8% in the trailing four quarters. It has a long-term earnings growth rate of 8.7%.

Estee Lauder delivered an average positive earnings surprise of 13.7% in the trailing four quarters. It has a long-term earnings growth rate of 11.8%.

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