It has only been a week since Conagra Brands, Inc. (CAG - Free Report) released its second-quarter fiscal 2019 results, and its shares have already plummeted 26.3%. In fact, the Zacks Rank #4 (Sell) stock has lost close to 42% this year, wider than the industry’s decline of 22%.
Although the top and bottom lines improved year over year and surpassed the Zacks Consensus Estimate in the second quarter, prevailing input-cost hurdles and near-term woes associated with the Pinnacle Foods buyout seem to have bogged investors down.
Moreover, the Zacks Consensus Estimate for Conagra’s earnings have declined considerably in the past seven days. The consensus mark for the third quarter and fiscal 2019 have gone down from 57 cents to 53 cents and from $2.16 to $2.07, respectively, clearly highlighting analysts’ dented confidence.
What’s Weighing on Conagra’s Stock?
Escalated input costs have long been a threat to Conagra, and is likely to linger in the near term. Although the company’s adjusted gross margin improved year over year in the second quarter of fiscal 2019, Conagra continued being pressurized by input cost inflation of 2.9%. Notably, the company witnessed a rise in transportation and warehousing expenses. Higher costs of packaging and certain ingredients weighed on gross margin.
Moreover, Conagra’s continued focus on increasing retailer and marketing investments to improve ROI impacted gross margin, which may linger. Well, the company anticipates input cost inflation to be 3.0-3.2% in fiscal 2019, which is a threat to margins. Apart from this, sales at Conagra’s Foodservice segment have been witnessing year-over-year declines for four straight quarters now, owing to soft volumes.
In second-quarter fiscal 2018, sales at this segment declined 16.5%, owing to Trenton sale that accounted for about 6.1 percentage points of the decline. Organic sales fell 10.4%, with volumes down 12.9% mainly due to last year’s hurricane-related impacts. Well, Conagra’s focus on its value-over-volume strategy has also been hitting sales of this segment for some time. The second quarter also saw a decline in International sales, owing to foreign currency headwinds and the sale of Canadian Del Monte business. Continued impacts from these factors are a worry.
Further, we note that Conagra acquired Pinnacle Foods this October. Although the combined giant is likely to be the second largest player in the frozen foods space, Conagra does expect the hurdles related to Pinnacle Foods’ business to persist for some time. Incidentally, Pinnacle Foods hasn’t been performing too well for a while, due to soft sales in some of the significant brands, lack of innovation, intense competition and changing consumer trends.
Nevertheless, Conagra is well on track to fix these shortcomings through various initiatives, including a seamless integration. In fact, 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 speed up innovation and exploit the long-term benefits in the frozen foods space.
These factors along with Conagra’s value-over-volume strategy and focus on acquisitions should help the company uplift investors’ confidence.
Unsure About Conagra? Check These Solid Food Stocks
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