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Conagra Trims Fiscal 2020 View on Soft Consumption in Q3

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Conagra Brands, Inc. CAG lowered its guidance for fiscal 2020 nearly a month before its next earnings release. A weaker-than-anticipated category performance in third-quarter fiscal 2020 (ending on Feb 23, 2020) adversely impacted a broad range of categories in the food space, including those wherein Conagra operates. This compelled management to slash forecasts for fiscal 2020.

Guidance Cut in Detail

Management stated that weak consumption trends were first noticed in the foodservice industry with lower restaurant traffic this holiday season. Further, this softness extended to the retail space in January, which in turn weighed on several food categories. Although Conagra was anticipating tough year-over-year comparisons for the third quarter, it saw greater-than-expected category weakness.

Consequently, Conagra now expects fiscal 2020 net sales growth of 10-10.5%, down from 12.4-12.9% projected earlier. Organic sales growth is now expected to be flat to up 0.5% compared with the prior view of 1-1.5%. Further, the company lowered its adjusted operating margin guidance from 16.2-16.8% to 15.8-16.2%.

Finally, adjusted earnings from continuing operations for fiscal 2020 is now envisioned in the range of $2.00-$2.07 per share, indicating a decline from the previous guidance of $2.07-$2.17. The Zacks Consensus Estimate for fiscal 2020 earnings is currently pegged at $2.12 per share. Notably, Conagra’s adjusted earnings from continuing operations came in at $2.01 per share in fiscal 2019.

Conagra on Track With Fiscal 2022 Goals

Despite the aforementioned third-quarter trends, Conagra remains optimistic about its brand strength, focus on innovation and the Conagra Way playbook. During the quarter, the company gained share in several categories. Further, management stated that it is seeing some improvement in the consumption trends and anticipates organic sales to grow year over year in the fourth quarter.

Also, the company remains focused on achieving its leverage target for fiscal 2021 and goals for fiscal 2022, though management revised part of its fiscal 2022 target owing to divestitures. The company continues to expect organic sales growth (3-year CAGR ending fiscal 2022) of 1-2%. Adjusted operating margin for fiscal 2022 is still envisioned in the range of 18-19%. However, the adjusted earnings per share from continuing operations guidance was reduced by 2 cents to $2.66-$2.76 due to the recent divestiture impacts.

Though Conagra’s third-quarter performance looks troubled by soft consumption trends, we expect its growth endeavors to help maintain the solid momentum in the near term. Notably, this Zacks Rank #3 (Hold) stock has gained 8.8% in the past six months, outpacing the industry’s growth of 4.4%.

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