Conagra Brands, Inc. (CAG - Free Report) is sailing on rough seas lately, thanks to escalated input costs, increased marketing investments and drab performance in the Foodservice segment. These downturns hurt investors’ confidence in the stock that declined 9.7% in the past three months compared with the industry’s fall of 3.4%. Nonetheless, management is executing solid efforts to aid a turnaround for the Zacks Rank #3 (Hold) company.
Hurdles in the Path
Higher transportation and input costs as well as greater retailer investments are weighing on Conagra’s profitability metrics. In fact, such deterrents caused adjusted gross profit to inch down 0.6% and adjusted gross margin to contract 60 basis points (bps) during the first quarter of fiscal 2019. Moreover, the company anticipates input cost inflation to be 3.0-3.2% in fiscal 2019, primarily stemming from inflation in transportation and packaging categories.as well as in some commodities. In fact, packaging inflation estimates also include expected impacts from tariffs.
Further, sales in the Foodservice segment have been witnessing year-over-year declines for three straight quarters now, thanks to soft volumes. In first-quarter fiscal 2019, sales in the segment declined 6.9% year over year, due to the divestitures of Trenton. Further, management expects Foodservice sales to remain somewhat challenged in the second quarter due to tough year-over-year comparisons stemming from hurricanes. This combined with weakness in the Grocery & Snacks category are expected to weigh on the company’s top line in the second quarter.
Strategic Efforts to Counter Challenges
Conagra is focused on boosting performance on the back of unique value-over-volume strategy. Under this routine, the company ensures that robust volume performance is not driven by price discounts but by stronger innovation as well as new merchandising, distribution and consumer trail-related investments.
Further, the company is pursuing significant acquisitions to reshape its portfolio. In this respect, the company tries to acquire high-margin generating businesses while divesting the less profitable ones. The company’s latest development on this front includes the acquisition of Pinnacle Foods. The consolidation of these food companies is likely to create a robust portfolio of leading, iconic and on-trend brands, which will help the combined entity accelerate innovation and exploit the long-term benefits in the frozen foods space.
In previous instances, Conagra took over Angie's Artisan Treats, LLC. and Sandwich Bros. In fact, contributions from Angie's BOOMCHICKAPOP and Sandwich Bros. buyouts aided Conagra’s first-quarter sales growth by about 200 bps. Meanwhile, the company has exited private label brands and non-key businesses including Spicetec and JM Swank.
Although the company expects some shortcomings in the second quarter, management is confident about fiscal 2019 performance, wherein net sales is expected to increase 0.5-1.5% and organic sales growth is expected to be 1-2%. We expect that the company’s value-over-volume strategy along with efforts to undertake innovations and brand renovation initiatives will provide sufficient impetus to boost sales as well as cushion the aforementioned hurdles.
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