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Conagra's (CAG) Shares Rise Despite Q3 Earnings & Sales Miss

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Conagra Brands, Inc. CAG posted dismal third-quarter fiscal 2020 results, with the top and the bottom lines declining year over year and missing their respective Zacks Consensus Estimate. Sales were marred by soft organic sales as well as divestitures of the Wesson oil, Gelit, DSD Snacks and Lender's Bagel businesses along with the exit of the private label peanut butter business (together termed as “Sold Businesses”). Earnings were hurt by soft sales and higher tax rate among other factors.

Management stated that its fourth-quarter to date performance is gaining from solid shipments and consumption in its domestic retail business, stemming from the growing spread of COVID-19. This has helped the company counter softness in its foodservice business. Despite the uncertain situation, management expects to exceed its previously-projected sales and profit targets for fiscal 2020, given an undisturbed supply-chain network. Shares of the company gained more than 3% during the pre-market trading session on Mar 31.

Quarter in Detail

Conagra’s quarterly adjusted earnings came in at 47 cents, which fell short of the Zacks Consensus Estimate of 49 cents. Moreover, the figure tumbled 7.5% from adjusted earnings of 51 cents reported in the year-ago quarter. The year-over-year decline was caused by reduced operating profit, escalated tax rate and a decline in equity method investment earnings.

Conagra Brands Inc. Price, Consensus and EPS Surprise



Conagra Brands Inc. Price, Consensus and EPS Surprise

Conagra Brands Inc. price-consensus-eps-surprise-chart | Conagra Brands Inc. Quote

Conagra generated net sales of $2,555 million, which fell 5.6% year over year and missed the Zacks Consensus Estimate of $2,580 million. The year-over-year sales decline was caused by divestiture of Sold Businesses and lower organic sales, somewhat offset by favorable currency movements. 

Organic sales dropped 1.7% on lower volumes and unfavorable price/mix. Volumes were hurt by broad-based category weakness in the retail and foodservice businesses in the beginning of the quarter. Price/mix was hampered by increased promotions and higher retailer investments.

Adjusted gross profit tumbled 10.5% to $699 million on account of lost profits from sold businesses, inflated input costs, greater brand-building investments related to retailers, reduced sales volumes and greater inventory write-offs. Productivity and cost-synergies offered some respite.

Segmental Details

Grocery & Snacks: Quarterly sales in the segment came in at $1,022.9 million, which dropped 9.5% year over year due to divestiture of the Wesson oil and DSD snacks businesses along with exit from private label peanut butter business. Organic sales dipped 3.6% with volumes and price/mix down 1.7% and 1.9%, respectively.

Refrigerated & Frozen: Net sales slipped 1.6% to $1,073 million thanks to Gelit and Lender's Bagel business divestitures. Organic sales inched up 0.3%, with price/mix up 0.7% but volumes falling 0.4%.

International: Net sales fell 3.2% to $217.7 million on account of soft organic sales and divestiture of the Wesson oil business. Favorable currency movements offered some cushion. On an organic basis, net sales slipped 1.9%, as volumes dropped 0.9% and price/mix was down 1%.

Foodservice: Quarterly sales in the segment declined 8% year over year to $233.5 million as a result of sale of the Wesson oil and Lender's Bagel business along with exit from private label peanut butter business. Organic sales also fell 2.2% with volumes down 4.6% but price/mix up 2.4%.

Other Financial Fundamentals

Conagra exited the quarter with cash and cash equivalents of $99 million, senior long-term debt (excluding current portion) of $8,897.8 million and total stockholders’ equity of $7,863.9 million. During the first three quarters of fiscal 2020, the company generated net cash of $906.5 million from operating activities.

During the quarter, Conagra paid out a quarterly dividend of 21.25 cents per share.

Business Development

The company concluded the divestiture of Lender's Bagel business on Jan 2, 2020. Further, it concluded the sale of its peanut butter manufacturing facility (in Streator) on the first day of fiscal third quarter. This move forms part of Conagra’s efforts to optimize its peanut butter business. This includes exit of sale and production of private-label peanut butter.
 
Guidance

Management is uncertain about the impact of coronavirus on Conagra’s fiscal 2020 operating performance given the challenging situation. The company saw a considerable increase in demand in the retail business in the fourth quarter of fiscal 2020, till date. On the contrary, demand for foodservice products has reduced and the company expects foodservice organic net sales to slump 50-60% in fiscal fourth quarter.

In fiscal 2020, management expects to surpass its previously guided total sales and profits, considering proper functioning of its end-to-end supply chain.

Net sales growth is expected to come above the high end of the previously projected 10-10.5% range. Organic sales growth is likely to exceed the high end of flat to increase 0.5% range. Further, management projects the adjusted operating margin to be greater than the higher end of 15.8-16.2% band.

Adjusted earnings for the fiscal year are now anticipated to surpass the previously-projected range of $2.00-$2.07 per share. The Zacks Consensus Estimate is currently pegged at $2.04. 

Shares of this Zacks Rank #3 (Hold) company have declined 17.5% in the past three months compared with the industry’s drop of 22.2%.

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