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Here's Why Conagra Appears Unappetizing Post Q1 Earnings

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It looks like investors are not finding Conagra Brands, Inc. (CAG - Free Report) all that appealing. Evidently, this Zacks Rank #4 (Sell) stock has lost close to 10% this year, wider than the industry’s decline of 7.1%. In fact, the company has seen its shares tumble 7.3% in a span of just one week, on account of a disappointing first-quarter fiscal 2019 outcome.

What Went Wrong in Q1?

During the first quarter, both the top and the bottom lines came below the Zacks Consensus Estimate. In fact, this marked the company’s first earnings miss after four consecutive beats. Results were impacted by input cost inflation, which along with some other factors weighed on the gross margin. Also, the company’s Foodservice segment posted soft sales, mainly due to sale of the Trenton facility.

These factors along with a drab second-quarter sales outlook seem to have hurt investors’ confidence in Conagra. The company has seen its consensus mark for the second quarter go down by 4 cents to 60 cents over the past seven days.

Headwinds in Detail

During the first quarter of fiscal 2019, adjusted gross margin contracted 60 basis points (bps) to 28.6% due to elevated transportation and input costs, and greater retailer investments to improve ROI. Management stated that it looks to channelize investments from A&P marketing to retailer marketing, in order to generate higher returns. However, this is likely to weigh on gross margin. Also, the company anticipates input cost inflation to be 3.0-3.2% in fiscal 2019, as it is battling inflation in transportation and packaging categories, and also in some commodities. In fact, packaging inflation estimates also include some expected impacts from tariffs.

Apart from this, Conagra’s Foodservice segment sales have been witnessing year-over-year declines for three straight quarters now, owing to soft volumes. In first-quarter fiscal 2019, sales at this segment declined 6.9% year over year to $234 million, owing to Trenton sale (concluded in fiscal 2019 beginning) that accounted for about 700 bps of the decline. Organic sales were also hit by soft volumes, which fell 5% due to the company’s focus on its value-over-volume strategy.

Continued impacts from these factors may hurt Foodservice sales. Further, Conagra expects year-over-year sales growth in the second quarter to remain somewhat challenged, especially in the Grocery & Snacks and Foodservice units. This is accountable to the effects of hurricanes, which boosted net sales growth by 200 basis points in the year-ago period. For the second quarter, organic net sales growth (excluding Trenton) is expected between flat and slightly down. Net sales growth is anticipated to be nearly 40 bps lower than organic net sales growth.

Can Strategic Endeavors Pep Things Up?

Nonetheless, Conagra’s focus on acquisitions and value-over-volume strategy should drive its top line, which should provide cushion to the company from these aforementioned hurdles. Talking of buyouts, the company is set to acquire Pinnacle Foods , which is expected to close by the end of October, subject to certain approvals. Notably, the combined giant is likely to be the second largest player in the frozen foods space.

While these factors raise hopes for Conagra’s long-term prospects, we prefer staying away from the stock for the time being. Investors can instead binge on some better-ranked food stocks.

2 Stocks to Satiate Investors’ Palate

Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

McCormick & Company, Incorporated (MKC - Free Report) , has long-term earnings per share growth rate of 9% and a Zacks Rank #2 (Buy).

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