Conagra (CAG) Stock Rises On Q3 Earnings Beat, Sales Miss

Shares of Conagra Brands, Inc. (NYSE:CAG) climbed more than 7% in the pre-market session on Mar 21 following its third-quarter fiscal 2019 results. While its earnings beat the Zacks Consensus Estimate, revenues missed the same.

Results were aided by robust performance of its domestic retail segment along with improved consumption trends. Conagra witnessed sturdy growth in its frozen and snacks portfolios. The company’s Legacy Conagra business also performed well.

Earnings & Sales

Conagra’s quarterly adjusted earnings from continuing operations decreased 16.4% year over year to 51 cents. However, the figure surpassed the Zacks Consensus Estimate of 48 cents. The year-over-year decline was due to higher outstanding share count.

Conagra generated net sales of $2,707.1 million, which advanced 35.7% year over year but missed the Zacks Consensus Estimate of $2,750 million. Sales growth was driven by contributions from Pinnacle Foods and Sandwich Bros. buyouts. However, divestitures of Trenton production facility and Canadian Del Monte business weighed on sales growth. Additionally, foreign currency hurt sales by 0.5%.

Organic sales (excluding Trenton) increased 2%, mainly driven by higher Legacy Conagra volume and improved price/mix.

Gross Margin

Adjusted gross profit increased 30.5% to $781 million, with adjusted gross margin expanding to 28.9%. The upside was backed by Pinnacle Foods’ inclusion along with productivity gains from supply chain and favorable pricing in the Legacy Conagra business. This was somewhat offset by elevated transportation and input costs, and higher retailer marketing investments in the Legacy Conagra business.

Segmental Details

Grocery & Snacks: The segment’s quarterly sales came in at $862.6 million, which rose 2.9% year over year driven by solid growth in snacks portfolio. Organic sales grew 2.9% with volumes up 2.1%.

Refrigerated & Frozen: Net sales jumped 3.3% to $711.2 million as Sandwich Bros.’ buyout contributed about 90 bps to net sales growth. Organic sales increased 2.4%. Markedly, volumes rose 3.5%, backed by robust performance of the frozen portfolio.

International: Net sales dropped 11.4% to $198 million due to the divestiture of Canadian Del Monte business and adverse currency movements. On an organic basis, net sales dipped 0.9%, courtesy of 2% volume decline. Price/mix grew 1.1%.

Foodservice: The segment’s quarterly sales declined 8.7% year over year to $223 million, largely owing to Trenton facility’s sale. Organic sales declined 0.6% in the reported quarter. Volumes declined 6.7%, whereas price/mix rose 6.1%.

Pinnacle: Sales in this segment came in at $712.3 million, largely owing to Trenton facility’s sale. The soft performance of brands including Birds Eye, Wish-Bone, and Duncan Hines remains a matter of concern. Nevertheless, management is making efforts to get these brands back on track, which will take some time.

Other Financial Fundamentals

Advertising and promotion (A&P) costs declined 13.9% to $67.4 million due to shift in investments from A&P marketing to the retailer’s brand building investments in the Legacy Conagra business.

Conagra exited the quarter with cash and cash equivalents of $282.2 million, senior long-term debt (excluding current portion) of $10,911.8 million and total stockholders’ equity of $7,451.5 million. In the nine months ending Feb 24, 2019, the company generated net cash of $745.1 million from operating activities (continued operations).

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

Business Development

Conagra concluded the sale of Wesson oil business on Feb 25, 2019 and will use the net proceeds from this sale to reduce its debt level in the fiscal fourth quarter. Additionally, management stated that it is progressing well with the integration of Pinnacle Foods (acquired on October 2018) and realized cost savings of $12 million in the reported quarter. Going forward, the company expects cost synergies of more than $215 million from this buyout.

Conagra Brands Inc. Price, Consensus and EPS Surprise

Guidance

Conagra updated its fiscal 2019 guidance which now excludes the Wesson Oil business. Organic sales are expected to increase roughly 1%, excluding the impact from the sale of the Trenton facility. Adjusted gross margin is expected to be on the lower end of the prior view of 29.3-29.6%. Management projects adjusted operating margin to be at the higher end of the earlier guidance of 14.9-15.2%. The company continues to expect adjusted effective tax rate in the range of 24-25%. Adjusted earnings for the fiscal year is still anticipated to be $2.03-$2.08 per share.

Including the impact from Pinnacle Foods’ acquisition, Conagra anticipates net sales to be in the range of $1.71-$1.73 billion compared with the previous guidance of $1.70-$1.75 billion. Adjusted operating margin is likely to be at the higher end of earlier guidance of 14.6-14.9%.

Conagra currently carries a Zacks Rank #3 (Hold). Shares of the company have gained 7.2% year to date against the industry’s growth of 4%.

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