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Conagra Gains From Acquisitions, High Costs Remain a Worry

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Rising input costs and weakness in the Foodservice segment unit are making matters difficult for Conagra Brands, Inc. (CAG - Free Report) . Nevertheless, the company is relying on efficient strategies to ensure profitability and stay afloat. Let’s take a closer look at the factors that are impacting this well-known food company.

Strategies to Boost Sales Bode Well

In a bid to boost competency, Conagra is trying to acquire high-margin generating businesses while divesting the less profitable ones. In sync with this, the company completed the acquisition of Pinnacle Foods in October 2018. The consolidation of these food companies has helped to create a robust portfolio of leading, iconic and on-trend brands. Markedly, this buyout boosted the company’s net sales during the third quarter of fiscal 2019. Going ahead, it expects to generate annual run-rate cost synergies of more than $215 million from this buyout. The combination of these businesses is likely to be a strategic fit, especially at a time when demand for frozen foods and snacks category is perking up. Other noteworthy buyouts of the company include, Angie’s Artisan Treats, LLC and the Sandwich Bros.

Speaking of frozen and snacking businesses, these segments are doing well lately. The company’s dedicated efforts to boost brands in these categories have improved consumption trends and base sales. It is on track with brand renovation and innovation in these segments.

Further, Conagra remains focused on boosting performance on the back of its unique value-over-volume strategy. The company ensures that its volume performance is not driven by price discounts but by strong innovations as well as new merchandising, distribution and consumer trail-related investments. Encouraged by the robust results following the adoption of the strategy, it plans to extend the same to the Pinnacle Foods portfolio.

Roadblocks in Conagra’s Path

High input costs have long been a factor plaguing the U.S. food space. Notably, Conagra is witnessing inflation in areas such as transportation, crops and packaging. These have been putting pressure on the company’s gross margin. Other industry players such as General Mills (GIS - Free Report) , Campbell Soup (CPB - Free Report) and United Natural Foods (UNFI - Free Report) have also been bearing the brunt of input cost inflation.

Sluggishness in the Foodservice segment is another major drawback for the company. Sales at this unit have been witnessing year-over-year declines for five straight quarters now, owing to soft volumes. In third-quarter fiscal 2019, sales declined 8.5% year over year, owing to the Trenton facility divestiture. Organic sales in the segment fell 0.6%, with volumes down 6.7%. Conagra is also being adversely impacted by currency fluctuations. In fact, during the third quarter, currency headwinds hurt the company’s top line by nearly 0.5 percentage point.

Wrapping Up

We believe that this Zacks Rank #3 (Hold) company’s strategic buyouts and investments in profitable business areas will continue to boost sales. This is expected to provide some respite from the aforementioned headwinds. In fact, the company’s prudent efforts are fueling investors optimism in the stock. Notably, shares of the company have gained 18.5% in the past month compared with the industry’s rise of 3.2%.     

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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