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Conagra's (CAG) Q2 Earnings Beat Estimates, Sales Up Y/Y

Zacks Equity Research

Conagra Brands, Inc. CAG released second-quarter fiscal 2020 results, wherein earnings beat the Zacks Consensus Estimate for the second straight time but sales marked its fourth consecutive miss. Nonetheless, the top line advanced year over year on the back of gains from Pinnacle Foods, partly countered by divestitures of the Wesson oil business, Gelit and DSD Snacks businesses (also known as “Sold Businesses”). Shares of the company gained more than 5% during the pre-market trading session on Dec 19.

Results gained from the Conagra Way playbook and robust momentum in the frozen and snacks business. Further, the company’s grocery brands — Hunt's and Chef Boyardee — performed well. Additionally, the company made solid progress with Pinnacle Foods’ integration. Conagra expects to see a strong performance in the second half of fiscal 2020, on the back of innovation in frozen and snacks categories, continued promotions of key brands, constant synergies and Pinnacle Foods’ action plan.

Earnings & Sales

Conagra’s quarterly adjusted earnings came in at 63 cents, which surpassed the Zacks Consensus Estimate of 57 cents. However, the figure declined about 6% from 67 cents reported in the year-ago period. The year-over-year decline was caused by higher outstanding share count, partly offset by increased adjusted net income. Adjusted net income growth was backed by Pinnacle Foods’ operating profit, cost-saving synergies and higher organic sales.

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 $2,820.8 million, which advanced 18.3% year over year but missed the Zacks Consensus Estimate of $2,825 million. The year-over-year sales growth was driven by contributions from the Pinnacle Foods buyout and organic sales growth. However, divestiture of Sold Businesses weighed on sales.  Organic sales climbed 1.6% on favorable volumes and price/mix.

Gross Margin

Adjusted gross profit grew 14.1% to $804 million, backed by the net impact of Pinnacle Foods’ inclusion, improved price/mix, supply-chain efficiencies and cost-saving benefits. This was countered by lost profits from Sold Businesses, inflated input costs and greater brand-building investments related to retailers.

Segmental Details

From the first quarter of fiscal 2020, Conagra no longer reports Pinnacle Foods as a separate segment. Pinnacle Foods’ operations are allocated to the company’s four Legacy reporting segments.

Grocery & Snacks: Quarterly sales in the segment came in at $1,142.5 million, which increased 14.2% year over year owing to contributions from Pinnacle Foods, somewhat offset by the divestiture of the Wesson oil and DSD snacks businesses. Organic sales rose 0.9%, with volumes up 2.1% but price/mix down 1.2%.

Refrigerated & Frozen: Net sales rose 28.8% to $1,168.3 million. Gains from Pinnacle Foods were somewhat negated by Gelit’s divestiture. Organic sales climbed 2.4%, with volumes and price/mix up 0.5% and 1.9%, respectively.

International: Net sales grew 7.3% to $234.3 million, thanks to Pinnacle Foods’ acquisition. This was offset by the divestiture of the Wesson oil business as well as adverse currency movements. On an organic basis, net sales increased 1.8%. Volumes rose 1.8%, while price/mix was flat.

Foodservice: Quarterly sales in the segment grew 6.8% year over year to $275.7 million, primarily owing to Pinnacle Foods’ inclusion, somewhat negated by the sale of the Wesson oil business. Organic sales climbed 0.8% in the reported quarter, with volumes down 2.8% but price/mix up 3.6%.

Other Financial Fundamentals

Conagra exited the quarter with cash and cash equivalents of $192 million, senior long-term debt (excluding current portion) of $9,100 million and total stockholders’ equity of $7,690.6 million. During the first half, the company generated net cash of $427.5 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 the DSD snacks business on Oct 21. Further, it concluded the sale of its peanut butter manufacturing facility (in Streator) after the end of the quarter under review. This move forms part of Conagra’s efforts to optimize its peanut butter business. To this end, the company also decided to exit its private-label peanut butter business. Apart from this, Conagra inked a deal to offload its Lender's bagel business, which is part of the Refrigerated & Frozen segment. This sale is expected to conclude in the third quarter.
 
Guidance

Considering the divestiture of DSD Snacks and the exit from the private-label peanut butter business, Conagra lowered its sales 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.

Organic sales are still expected to increase 1-1.5%. Further, management projects the adjusted operating margin to be 16.2-16.8%.

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. The midpoint of $2.12 stands above the current Zacks Consensus Estimate of $2.11.  

Conagra currently carries a Zacks Rank #4 (Sell). Shares of the company have declined 1.8% in the past three months against the industry’s growth of 1.4%.

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