Conagra's Frozen & Snacks Businesses Solid, Cost Woes Prevail

Focus on the growing frozen and snacks businesses, along with portfolio refinement efforts, has been working well for Conagra Brands, Inc. (NYSE:CAG) . These endeavors have been aiding this Zacks Rank #3 (Hold) company amid input cost inflation. Let’s delve deeper.

Frozen & Snacks Businesses Strong

Conagra is undertaking initiatives to boost the frozen and snacks businesses, which are expected to deliver a strong performance in the second half of fiscal 2020 on innovation, continued promotions of key brands, constant synergies and Pinnacle Foods’ action plan. In the frozen business, single-serve meals are particularly doing well. The company has several innovation lined up in the frozen category. Sales in the Refrigerated & Frozen segment increased 28.8% in the second quarter. Management expects its recent innovation under the Healthy Choice Power Bowls line and Marie Callender's brand, along with the planned innovation for the second half of the year, to boost the segment’s organic sales.

The company is also on track with innovation in the snacks business, which includes meat snacks with bold flavors and optimized packaging. Further, it is launching salty snacks in new markets and reframing the sweet treats brands. We note that during the second quarter, strength in the snacks business drove Conagra’s Grocery & Snacks segment sales, which rose 14.2%. The snacks business, in turn, gained from solid innovation and momentum across brands like Slim Jim, Angie's BOOMCHICKAPOP, Snack Pack, Swiss Miss and Act II.

Portfolio Refinement a Key Driver

Conagra is focused on reshaping its portfolio by acquiring high-margin businesses and divesting the less profitable ones. Incidentally, the acquisition of Pinnacle Foods (closed in October 2018) has been yielding results. The combination of the companies is appropriate, given the increasing demand for frozen foods and snacks. Notably, Pinnacle Foods’ buyout drove Conagra’s top line in second-quarter fiscal 2020 and the trend is likely to continue in the forthcoming periods. Also, the company raised its fiscal 2020 synergy target with this buyout, from around $160 million to roughly $180 million.

Conagra’s other buyouts include Angie's Artisan Treats and Sandwich Bros, which have been valuable additions to its snacks and frozen businesses, respectively. Meanwhile, the company has exited private-label brands and non-key businesses, including the Lender's bagel business, DSD snacks business, Wesson oil business, Gelit, the Trenton production facility and the Canadian Del Monte business. It also concluded the sale of its peanut butter manufacturing facility (in Streator) after the second quarter of fiscal 2020. This move is part of Conagra’s efforts to optimize its peanut butter business.

Driven by such upsides, Conagra’s shares have gained 60.5% in a year, crushing the industry’s growth of 16%.

Cost Inflation

Escalated input costs have been affecting Conagra’s performance for a while. During the second quarter of fiscal 2020, the company’s adjusted gross profit was hurt by input cost inflation, reduced profits stemming from the divestiture of the Sold businesses and greater brand-building investments related to retailers. For fiscal 2020, the company anticipates inflation of about 2.8%, primarily due to protein.

Further, considering the divestiture of DSD Snacks and the exit from the private-label peanut butter business, Conagra lowered its sales and earnings guidance for fiscal 2020. On a reported basis, net sales are expected to rise 12.4-12.9% now compared with 13.5-14% growth expected earlier. Adjusted earnings for the fiscal year are now anticipated to be $2.07-$2.17 per share compared with $2.08-$2.18 forecasted earlier.

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