Conagra Brands, Inc. CAG was in the limelight yesterday, courtesy of two major developments. The company posted better-than-expected results for fourth-quarter fiscal 2018, while it also announced a definite deal to acquire Pinnacle Foods Inc. PF.
Well, Conagra’s shares tumbled 7.3% yesterday, taking this Zacks Rank #4 (Sell) stock’s year-to-date performance to a decline of nearly 5% compared with the industry’s decline of 6.1%. Let’s delve deeper into Conagra’s fourth-quarter performance.
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Better-than-Expected Earnings & Sales
In the fiscal fourth quarter, Conagra’s quarterly adjusted earnings from continuing operations came in at 50 cents, surpassing the Zacks Consensus Estimate of 43 cents. Notably, this marked the company’s fourth consecutive earnings beat. The bottom line also came in 35.1% higher than the year-ago tally, courtesy of higher gross margin, lower share count and reduced effective tax rate. Notably, operating profit grew across all segments.
Conagra Brands Inc. Price, Consensus and EPS Surprise
onagra generated net sales of $1,966.2.5 million, which advanced 5.6% year over year and came ahead of the Zacks Consensus Estimate of $1,940 million. Sales were driven by contributions from buyouts and favorable currency movements. Continued strength in Refrigerated & Frozen and Grocery & Snacks segments, in particular, also drove sales.
Further, organic sales rose 2%, courtesy of robust growth in both retail and domestic units. Also, each segment witnessed improved pricing and mix, which offset continued retailer marketing investments to support brand saliency, improved distribution and customer trials.
Gross Margin Improves
Adjusted gross profit jumped 6.1% to $573 million with the adjusted gross margin expanding 12 basis points to 29.2%. The upside came on the back of better price/mix, benefits from buyouts and solid supply-chain productivity. This was somewhat negated by elevated input and transportation costs.
Segmental Details
Grocery & Snacks: The segment’s quarterly sales came in at $803 million, up 7.1% year over year. Duke’s, BIGS and Angie's BOOMCHICKAPOP acquisitions contributed nearly 600 bps to net sales growth. Organic sales grew 1.1%. While volumes dipped 0.3%, price/mix climbed 1.4%. Price/mix was fueled by mix gains from recent innovations and better pricing, which together compensated for retailer marketing investments to support brand saliency, improved distribution and customer trials.
Refrigerated & Frozen: Net sales jumped 7.9% to $691 million, as Sandwich Bros.’ buyout contributed about 270 bps to net sales growth. Organic sales increased 5.2%. Markedly, volumes and price/mix increased 2.9% and 2.3%, respectively. Volumes were backed by focus on innovation in certain categories and key business growth, while price/mix gained from both better net pricing and mix.
International: Net sales climbed 2% to $209 million, largely driven by favorable currency movements. However, sales slipped 0.6% on an organic basis. Volumes fell 2.5%, whereas price/mix grew 1.9%, owing to strength in Conagra’s ongoing value over volume strategy.
Foodservice: The segment’s quarterly sales summed $264 million, down 1.2% year over year. Volumes went down 5.4% on account of the company’s focus on its value over volume strategy. Price/mix rose 4.2%, on the back of favorable product mix and better pricing to counter inflation.
Other Financial Fundamentals
Advertising and promotion (A&P) costs were 21.2% lower at $59 million, as management continues to shift investments from A&P marketing to the aforementioned retailer marketing.
Conagra exited the fiscal fourth quarter with cash and cash equivalents of $128 million, senior long-term debt (excluding current portion) of $3,035.6 million and total stockholders’ equity of $3,756.6 million. In fiscal 2018, Conagra generated net cash of $919.7 million from operating activities (continued operations).
During the fourth quarter, Conagra repurchased nearly 3 million common stock for $107 million, while it paid quarterly dividend per share of 21.25 cents. Further, management intends to retain its existing annual dividend per share rate during fiscal 2019, owing to Pinnacle Foods’ buyout. Also, in May, the company unveiled a new buyback plan, authorizing additional buybacks of about $1 billion.
Other Developments
Conagra announced a final deal to acquire all shares of Pinnacle Foods for nearly $10.9 billion. The transaction is expected to conclude by the end of 2018.
Management expects to conclude the sale of its Canadian Del Monte processed fruit and vegetable business to Bonduelle Group in July 2018. Also, on May 31, Conagra divested its Trenton, MO, production facility. Owing to this sale, the company’s Foodservice segment exited a co-manufacturing arrangement that garnered net sales of nearly $79 million in fiscal 2018. This divestiture is likely to hurt organic sales of this segment as well as the overall company in fiscal 2019.
Fiscal 2019 & Q1 Outlook
Conagra plans to adopt Accounting Standard Update (ASU) 2017-07 in the first quarter of fiscal 2019. While this will impact the company’s adjusted operating profit, the new standard will not affect Conagra’s reported net income.
In fiscal 2019, reported net sales are anticipated to increase 0.5-1.5%. Organic sales are expected to increase in a bracket of 1-2%, excluding the impacts from sale of Trenton facility and associated Foodservice business’s exit.
Adjusted gross margin is expected in a range of 29.7-30.0%, while input cost inflation is guided between 3.0% and 3.2%. Management projects adjusted operating margin in a band of 15.0-15.3%, which reflects the impacts of the abovementioned adoption of new accounting standard. Effective tax rate is likely to be in the range of 23-24%.
Q1 View
Reported net sales is anticipated to increase by 2.0% to 2.5%, while adjusted operating margin is expected to come in a range of 14.1-14.4%.
Finally, Conagra envisions adjusted earnings in a range of 46-49 cents per share for the first quarter compared to the year-ago period earnings of 46 cents. The Zacks Consensus Estimate for the first quarter earnings is currently pegged higher at 55 cents.
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